Flashcards
Monopsony
Cards in this deck (13)
- 1What shape is the labour supply curve when a perfectly competitive labour market is assumed?Horizontal as each firm is a price (wage) taker and faces perfectly elastic labour supply
- 2What does the perfectly competitive labour market model suggest if wages change?- Offering below the going wage rate results in immediate loss of all workers
- Offering above the going wage rate results in being inundated with workers - 3What is monopsony?Large dominant employer (single 'buyer' in the labour market)
- 4How do monopsonists hire more workers?They must increase the wage offer
- 5What is the marginal cost in a monospony?The higher wage that must be paid to this new worker + the cost of raising the wage for all of the existing workforce
- 6How are profits maximised?Hire Emon workers (where MC and demand curves intersect) at Wmon (Emon intersection with the supply curve)
- 7How does the profit maximising decision impact employment?Results in underemployment (firm would like to hire E* at W*) as there is insufficient amount of people willing to work in the labour force at wage Wmon.
- 8How are monopsonists exploitative?Exploits position as the sole buyer to pay workers less than their VMP to maximise profits
The extent to which wage differs from VMP is therefore a measure of monopsony power - 9How are labour elasticity and exploitative measure related?Less elastic labour supply = greater exploitation as workers are less sensitive to changes in wage
VMPn = w(1 + 1/σ) ==> (VMPn - w)/w = 1/σ - 10Why might workers choose to stay at a firm if wages are reduced?- Firm differentiation and worker preferences: Firms differ certain characteristics and worker preferences differ across these characteristics. Distribution of reservation wage means not all leave
- Moving costs: searching, relocation + psychological costs to moving. If firms can wage discriminate then firms pay lower wages to group with higher moving cost
- Imperfect information and search: not full info about available jobs + firms not full info about workers. Search process occurs with matching. Posting higher wage attracts more workers - 11What is oligopsony?Few firms in the labour market
Wage settlers - take into account actions of other firms
Exploitation measure inversely proportional to number of firms - 12Summarise a paper on monopsonyStaiger et al. (2010)
Exploits natural experiment in wage setting of registered nurses (RNs)
Before 1991, hospitals ran by US dep, Vet Affairs (VA) used national pay scale of RNs not taking into account regional differences in cost of living
Very competitive in some areas and not in others.
Nurse Pay Act (1990) tied VA wage to local labour market: increase wage if below prevailing wage otherwise held constant nominally until parity with other hospitals
Non-VA RNs used as control group.
DiD analysis - 13What was found in the monopsony paper?Between 1990 and 1992:
12.5% increase in wage at VA hospitals and a 9.9% increase in non-VA hospitals
8.3% increase in RNs in VA hospitals and 5.6% increase in RNs in non-VA hospitals
2.7/2.6 = 1: 1% change in VA wage = 1% increase in RNs to VA hospitals
Low labour elasticity
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- Year 2 ECN21005 - Labour Economics Flashcards on Monopsony, created by Imogen Donoghue on 21/01/2023.
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- Imogen Donoghue
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