Labor Economics: Description and analysis of monopsony in the labor market - Research Paper Example

Download file to see previous pages... Just like monopoly, Monopsony also results in the inefficiency of the market. This happens due to the fact that a monopsonist avoids buying those last few units of a good whose value is greater than the marginal cost, to ensure that the price of already bought units is held down. A nicely placed price floor can lessen the inefficiency caused by Monopsony, removing the power of a monopsonist over price and eliminates his motivation to control the quantity it purchases. But a too high price floor can restrict the monopsonist and he may reduce his purchases, causing inefficiency. Let us now consider a labor market. In this market the employers are considered to be buyers, the workers are the sellers, time and effort is the good, whereas the price is the level of the wage or salary. An employer who is monopsonist keeps the level of wages down by controlling the number of workers he hires. This results in an inefficient employment and worker’s contribution to output is far greater than the salary he gets. Pigou (1924, p. 754) termed this condition as the “rate of exploitation”. We can show this mathematically that an employer who is monopsonist will opt or a rate of exploitation which is equal to the reciprocal of the labor supply elasticity. Those employers who are competitive face infinite labor supply elasticity. ...
Hence, the Monopsony model can be a way to offer justification and reasoning for minimum salary laws, as such laws and policies increases wages, enhances the chance of better employment rate, and ultimately improve and stabilize the economy. Monopsony Models There are several Monopsony models which are made to fit the real world scenario. One such model is the Oligopsony model. In this model, the employer has the power over the salaries and wages if they are not in big numbers. This power might come from mutual agreement between the employer and the workers, or it might come from the inflexible attitude of the workforce. The latter condition is called the Cournot model, which states that if an employer decides to cut the wages, then he will not lose his entire workforce to hi rival employer just because he will not be able to absorb additional workers immediately. As a result the employer enjoys some sort of liberty over the control of wages. This model implies that if the concentration of employment would be greater, then the rate of exploitation would also be high, keeping the labor demand and supply constant. Employer differentiation is another elaboration, which implies that if the employers vary by working conditions or by their locations, then they might not be treated as perfect substitutes by the workers. An employ that exploits and cut wages may lose some of his working force. Hence he has the authority up to that extent, to exploits and cut wages, that his rivals are either far away or they offer different sort of jobs. Recent studies and elaborations of this concept have focused on the process of hiring workers. It can be stated that workers once hired require a considerable increase in wages in order to change ...Download file to see next pagesRead More