Questions on monopsony

“Readers Question – A microeconomics question. In you labour market section you discuss a monopsonist.You say that “in order to employ one extra worker the firm has to increase the wages of all workers”- why? You give a coal mine as a possible example of a monopsonist, do you really think that a coal mine owner hired an extra worker(the marginal cost) and then increased the “wages of all workers”? Can you clarify this.

Just think of an upwardly sloping supply curve of labour.

supply curve

  • If the firm offers a wage of £100, it can employ 10 workers.
  • To employ 11 workers, it would have to increase the wage rate to £110.

Therefore, according to this supply curve, if the firm needs to employ 11 workers the firm has to pay every worker £110. Therefore the marginal cost of employing an 11th worker is £210 (11*110 = £1,210 – 10*100). The marginal cost of the 11th worker is greater than the average cost

Theory and in practice

1. Wage discrimination. One exception would be if a monopsonist could wage discriminate – i.e. pay £110 to the extra worker, but continue to pay £100 to the existing mine workers. In reality this could be possible. For example, the firm could introduce a special post or job title which pays £110, whilst the existing workers get stuck on £100. If the monopsony can get away with this, then it will not have to pay every worker £110.

2. Elastic supply. Also, another possibility is that the supply curve is very elastic, therefore there may be infinite (or at least a very large) supply of labour at £100. For example, in a period of high unemployment, there are probably many workers willing to supply there labour at £100. Many coal mine owners may find, even at low wages, a large pool of unemployed workers willing to take a job at £100.

However, the theory of an upward sloping supply curve suggests that the marginal cost of employing an extra worker will increase faster than average cost.

Readers Question: My confusion gets worse as on the same page you say that one of the problems with a monopsonist is it can “lead to lower wages for workers”. Doesn’t this contradict your above point about a monopsonists increasing all workers’ wages as it employs one extra worker?

The key thing is that a monopsonist is reluctant to hire extra workers, precisely because it would have to increase wages of all workers (high marginal cost). Because of this prospect the monopsonist prefers to employ less workers and pay lower wages. To profit maximise, it avoids the extra marginal cost of paying all workers more.


This diagram shows a theoretical monopsony. It’s profit maximising decision is to employ only Q2 workers at a wage of W2. (where MRP = MC). This is a lower wage and lower quantity of workers than in a perfectly competitive market.

See: Monopsony for more explanation

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Flexible Labour Markets and Immigration

There is an interesting article in the Economist about immigration and the impact on the Irish economy. Immigration tends to encourage a range of emotive responses, but, its impact on the flexibility of labour markets is worth considering. In the boom years, Ireland was growing by up to 5% a year or more. Growth was …

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Question on Immigration and the Black Market

Readers Question – what on earth is the black market and how does the immigrant have an impact on that?

The black market is a colloquial term that refers to economic activity that is not regulated by the government. It involves economic activity where people don’t declare tax returns or pay VAT e.t.c.

It is more generally referred to as the ‘underground economy’ or ‘hidden economy’. This underground economy may involve illegal activity such as drug dealing or it may involve typical jobs such as paying a builder in cash – this becomes non-legal activity. Note it is a legal requirement to declare income to the inland revenue. But, it can be hard to trace and track down.

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Male Inactivity Rates in UK 2008


Readers Question ‘Evaluate two policies which the government might adopt to reduce the male inactivity rate’

Main Reasons for Inactivity in Labour Market

Inactivity rates imply that people have left the labour market and are not able or are unwilling to seek employment. According to the ONS, inactivity rates can be caused by:

  • Being a student
  • Looking after family/home
  • temporary sickness
  • long-term sickness
  • Discouraged
  • Retired (early)
  • Other
economic activity
Source: ONS (nov, 2011)

Policies To Reduce Inactivity Rates

1. Make It more difficult to gain sickness / long term disability benefits. It is argued that it has become too easy for the long term unemployed to be given sickness benefits. The government could introduce a scheme where those on benefits are revaluated every 12 months and given the option to take on light work. This could help reintegrate them into the labour market.

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Minimum Wage in UK to rise to £5.73

The government has announced that the National Minimum wage will rise to £5.73 for workers over 21 – by the end of 2008. This means for a worker on a 40 hour week, their take home pay will be £229 per week. This also attracts top up benefits from the government in the form of family tax credits.

Trades Unions had suggested that the Minimum wage should rise to £6.75 a rate, a rate which would lift workers out of needing government benefits. Employers, predictably, were happy that minimum wages have only increased in line with inflation.

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