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Market Power in Labor Markets: Unions, Monopsony, and Minimum Wage Impacts

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Explore how labor unions influence wages, the dynamics of monopsony markets, and the impact of minimum wage laws on labor market equilibrium.

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Market Power in Labor Markets: Unions, Monopsony, and Minimum Wage Impacts

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  1. Appendix to Chapter 14: Market Power in the Labour Market

  2. Market Power in the Labour Market • Just as a monopoly firm can restrict output and raise price, so can a monopoly owner of a resource restrict supply and raise price. • The main source of market power in labour markets is a labour union, which is an organised group of workers that aims to increase wages and influence other job conditions.

  3. Market Power in the Labour Market • A Union in a Competitive Labour Market • Unions try to restrict the supply for union labour and raise the wage rate. • But this action also decreases the quantity of labour demanded.

  4. Su Sc Du Dc A Union in a Competitive Market Figure A14-1 9 Wage rate (dollars per hour) 8 7 0 85 90 100 Labour (hours per day)

  5. Market Power in the Labour Market • How Unions Try to Change the Demand for Labour • A union tries to make the demand for union labour inelastic and to increase its demand • This lowers the employment lost from a higher wage rate • Unions try to increase the demand for union labour by making them more productive through training schemes, apprenticeships and other on-the-job training activities. • Unions action increase the supply of labour in non-union markets.

  6. Monopsony • A monopsonyis a market with a single buyer. • The employer determines the wage rate and pays the lowest wage at which it can attract the labour it plans to employ • A monopsony makes a bigger profit than a group of firms that compete with each other for their labour • The ability of a monopsony to cut the wage rate and employment and make an economic profit depends on the elasticity of labour supply

  7. MCL S Competitive equilibrium MRP = D Monopsony equilibrium A Monopsony Labour Market Figure A14-2 10.00 7.50 Wage rate (dollars per hour) 5.00 0 50 100 Labour (hours per day)

  8. Monopsony • Monopsony and a Union • Sometimes both the firm and the employees have market power when a monopsony encounters a labour union, a situation called a bilateral monopoly. • In bilateral monopoly bargaining determine the wage rate

  9. Monopsony • Monopsony and the Minimum Wage • The imposition of a minimum wage may actually increase the level of labour hired by a monopsony. • Figure A14.3 shows why.

  10. MCL S Minimum wage MRP Increase in employment Minimum Wage Law in Monopsony Figure A14-3 10.00 7.50 Wage rate (dollars per hour) 5.00 0 50 100 Labour (hours per day)

  11. END CHAPTER 14 Appendix

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