David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

10.5 Industry labour market equilibrium
The monopsony, in contrast to a competitive firm in
the labour market, does not take the wage as given. The
wage is now upward sloping since the monopsonist
faces an upward-sloping labour supply. The higher
the wage, the higher is the number of workers willing
to work. The average cost of the monopsonist is just
the wage and it is increasing with the number of
workers.
The marginal cost of a monopsony is upward sloping.
A monopsonist recognizes that expanding employment
bids up the wage. If all workers are paid the same wage,
the marginal cost of an extra worker is not just the
wage paid to that worker but also the rise in the wage
bill for previously employed workers. The monopsonist's
marginal cost of labour exceeds the wage, and rises
with the level of employment. This implies that the
marginal cost is always above the average cost (ACL).
This is shown in Figure 10.7.
The monopsonist chooses the level of employment that
maximizes profits. This happens where MCL = MRPL. So the monopsonist chooses a level of employment
LM. The wage paid by the monopsonist is found by looking at the wage curve. The monopsonist pays
a wage given by W M· If, instead of a monopsonist, we have a perfectly competitive labour market,
the equilibrium wage will be given by the intersection of the labour supply (the ACL curve) and labour
demand (the MRPL curve). In that case, the level of employment will be Le and the equilibrium wage
will be We.
w
We -----
Figure 10.7
Monopsony power
A monopsonist, as we should expect from a firm with market power, employs fewer workers compared
with perfect competition. Moreover, the wage paid by the monopsonist is lower than the wage that would
be paid in a perfectly competitive labour market.
ACL =W
L
How common is monopsony?
II
Economists have often assumed that small firms probably face a pretty horizontal labour supply
curve - they can attract extra workers without bidding the wage up much. If so, monopsony is
more of a special case for textbook writers than something to worry about much in the real world.
However, in the past decade this view has been increasingly challenged. Even small firms not requiring very
many extra workers may have difficulty in attracting the workers they need without bidding up the wage they
have to offer.
For example, Professors Alan Manning and Steve Machin (2002) studied residential care homes in southern
England. Towns like Bournemouth and Eastbourne are famous as places in which the elderly cluster in their
retirement. Manning and Machin collected data on the wages paid to individual care workers in individual
retirement homes and discovered a surprising fact. There is a very large wage dispersion across care homes,
even after controlling for identifiable differences in their workers. This is difficult to reconcile with a labour
market in which each firm is a price-taker for labour. Monopsony may be more relevant than you first
thought.
Source: Adapted from Machin, S. and Manning, A. (2002) The structure of wages in what should be a competitive labour market, Centre
for Economic Performance, London School of Economics.
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