Monopsony2011A - Econ145.Monopsony2011A John Pencavel...

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1 Econ145.Monopsony2011A John Pencavel MONOPSONY IN LABOR MARKETS In our analysis of the firm, to this point, we have assumed the firm is a wage-taker: on a graph with wages on the vertical axis and employment on the horizontal axis, the firm’s supply of labor takes the form of a horizontal line at a given wage. I label a firm with a horizontal labor supply curve a “competitive” firm with respect to its activities in its labor market. Now consider a firm that faces an upward sloping labor supply curve: higher offered wages elicits an increase but finite supply of labor to the firm; a cut in the firm’s wages causes some of its workers to leave but not all. This implies that, if unconstrained by the state, the firm sets the wages it pays to its workers, something most firms would readily acknowledge. The level of the firm’s wage becomes its choice. In textbooks, a monopsonistic firm is sometimes described as the single buyer of labor in a market with many unorganized sellers (workers), but monopsony has come to connote any labor market in which each of many firms has an upward sloping labor supply curve. Denote this supply curve as E = g(w) with g N (w) > 0 . Provided the labor supply function constitutes a one-to-one mapping, the inverse of the firm’s labor supply function may be written w = h (E) where h is g -1 . The picture below depicts the type of relationship envisaged although the relationship need not exhibit the increasing slope as the one pictured in the graph.
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2 The wage is no longer exogenous to the firm: by choosing how many workers to employ, the firm is also determining the wage it pays. Hence if labor (and other input) demand functions contain as arguments only variables outside of the control of the firm, then wages are no longer an argument of the firm’s labor (and other input) demand functions. We might write the labor supply function to the monopsonist as E = g(w ; N ) where N stands for variables beyond the control of the firm such as other firms’ wages and N appears in the labor demand function. We take as the relevant case the nondiscriminating monopsonist: as the firm employs more workers so it is required to pay all workers a higher wage. A “discriminating” monopsonist pays workers (apparently identical in terms of skills) different wages perhaps according to differences in their reservation wages. The “discriminating monopsonist” would seem to require knowledge that is private information to each worker unless there is some revelation mechanism that could be employed. Even if the monopsonist had the
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3 information about each worker’s reservation wage, it may not be desirable for the firm to pay different wages to workers who appear the same and who do similar work if these differential wages damage the morale of the firm’s workforce.
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