a minimum wage and a monopsony employer
Introduction
A monopsony producer has significant buying power in the market for their inputs, be they raw materials and components or the purchasing of labour inputs.
The standard theoretical approach to the impact of a monopsony employer is that they can use their buying-power to drive down wage rates.
The monopsonist knows that they face an upward sloping labour supply curve, in other words, to attract more workers in their industry, they must pay a higher wage rate – so the average cost of employing labour rises with the number of people taken on. Because the average cost of labour is increasing, the marginal cost of extra workers will be even high, since we assume that an increase in the wage rate paid to attract one extra worker must also be paid to existing workers. This is shown in the next diagram.
The profit maximising level of employment is where the marginal cost of labour equates with the marginal revenue product of employing extra workers. In the diagram, Eq workers are taken on, but the monopsonist can employ these workers at an average wage rate of Wq – a pay level below the marginal revenue product of the last worker.
How might a minimum wage impact on employment and wage decisions of a monopsony?
Because the minimum wage is a pay floor, the monopsonist cannot pay a wage below it, so the NMW effectively becomes the marginal and average cost curve for hiring workers up to employment level Emin.
Thereafter to hire additional staff, the wage rate must be bid up, again creating a divergence between the average and marginal cost of labour.
The effect on the diagram above is that with an appropriately set rate, the profit maximising level of employment after a minimum wage is higher (E2) and the wage rate paid to labour has also increased (W2).
So in this particular example, making certain assumptions, a minimum wage might actually boost total employment and secure higher factor rewards for workers in occupations and industries where there is some monopsonistic power among the buyers of labour.
There are some doubts as to how many workers are actually in this position, remember that the UK minimum wage at its current rate affects directly less than one worker in ten so we cannot expect the monopsony justification to be a significant one when putting the argument for keeping a national minimum wage.
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