14.2 Wages and Employment in an Imperfectly Competitive Labor Market

Labor markets aren't always fair. Sometimes, one big employer calls all the shots. This is monopsony power, and it can really mess things up for workers. Wages go down, and fewer people get hired.

But don't worry, there are ways to fix this. The government can step in with minimum wage laws, antitrust policies, and support for unions. These tools help level the playing field and make sure workers get a fair shake.

Monopsony Power and Its Effects on Labor Markets

Monopsony Power

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Top images from around the web for Monopsony Power

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  Demand and Supply at Work in Labor Markets | OS Microeconomics 2e View original

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• 

  Labor Market Power by Employees | Public Economics View original

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• 

  Labor Market Power by Employers | Microeconomics View original

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  Demand and Supply at Work in Labor Markets | OS Microeconomics 2e View original

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  Labor Market Power by Employees | Public Economics View original

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• Monopsony power occurs when there is only one buyer of labor (employer) in a particular market granting the employer significant bargaining power over workers
• Monopsonistic employers face an upward-sloping labor supply curve meaning to hire more workers, they must increase wages for all employees, not just the additional ones
• Profit-maximizing monopsonistic employers hire fewer workers compared to a competitive market by setting wages where the marginal cost of labor equals the marginal revenue product of labor
• Monopsonistic employers pay lower wages than they would in a competitive market exploiting their market power to keep wages below the competitive level (Walmart in small towns, coal mining companies)

Imperfect Competition and Government Policies in Labor Markets

Imperfect Competition

• Imperfect competition in labor markets leads to lower wages and employment levels compared to competitive markets (monopsony, oligopsony, labor market concentration)
• Employers with market power set wages below the marginal revenue product of labor resulting in lower wages for workers and higher profits for employers
• Imperfect competition reduces employment levels as employers with market power hire fewer workers than they would in a competitive market
• Imperfectly competitive labor markets result in inefficient outcomes with a deadweight loss due to the underemployment of labor resources (job shortages, reduced economic output)

Government Policies

• Government policies address the negative effects of imperfect competition in labor markets
• Minimum wage laws raise wages for low-income workers, but if set too high, can lead to job losses and reduced employment
• Antitrust policies promote competition in labor markets by:
  1. Preventing mergers that increase labor market concentration
  2. Investigating and prosecuting anticompetitive practices by employers
• Collective bargaining rights help workers negotiate better wages and working conditions as unions counteract the bargaining power of employers and push wages closer to competitive levels
• Policies promoting education and skill development help workers become more competitive in the labor market reducing the market power of employers and leading to higher wages and employment levels (job training programs, subsidized higher education)