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Monopsony
A labor union faces a trade-off between wages and employment. Collective bargaining will
generally result in higher wages and fewer workers employed. But collective bargaining may
result in higher wages and more jobs, if the union is negotiating with a monopsony employer.
Monopsony – a lone buyer in a factor market.
An example of a monopsony employer of labor would be a company that is the only employer in a
small town. This type of situation was much more common fifty or one hundred years ago, when
a mine, a mill, or a factory might be the only employer in a “company town”.
Example 5: The town of McIntyre, Pennsylvania was established in 1910 by the Rochester and
Pittsburgh Coal and Iron Company. The company operated a company store and owned most of
the town. When the coal mines became unprofitable, the company sold the town in 1947.
Workers in a company town often lived in company-owned housing, with rent deducted from the
workers’ paychecks. The workers might be paid in company scrip, which could be spent only at
the company store. As the lone buyer in a factor market, a monopsony has market power and
faces an upward sloping labor supply curve. A monopsony’s hiring decision will affect the wage
rate in the market. A monopsony will have to pay a higher wage to employ more labor. A
monopsony’s marginal factor cost curve is not the same as its labor supply curve. The
monopsony’s MFC curve will be twice as steeply upward sloping as its labor supply curve.
Example 6: Monopso Company is a monopsony employer of labor. The table and the graph
below illustrate the labor supply curve and MFC curve for Monopso Company.
Wage Rate Labor Quantity Factor Cost MFC
$8 0 $0 X
9 1 9 $9
10 2 20 11
11 3 33 13
12 4 48 15
13 5 65 17
$17 -
16 -
MFC
15 -
14 -
Wage 13 -
Rate 12 -
S
11 -
10 -
9-
8-
z
0
0 1 2 3 4 5
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Quantity of Labor (hours)
Labor Unions 25 - 6