How do Employers Have Labor Market Power? 

How does market power by an employer affect labor market outcomes? Intuitively, one might think that wages will be lower than in a competitive labor market. Let’s prove it. We will tell the story for a monopsonist, but the results will be qualitatively similar, although less extreme for any firm with labor market power.

Think back to monopoly. The good news is that because the monopolist is the sole supplier in the market, it can charge any price it wishes. The bad news is that if it wants to sell a greater quantity of output, it must lower the price it charges. Monopsony is analogous. Because the monopsonist is the sole employer in a labor market, it can offer any wage that it wishes. However, because they face the market supply curve for labor, if they want to hire more workers, they must raise the wage they pay. This creates a quandary, which we can understand by introducing a new concept: the marginal cost of labor.

Related Topics

• Labor Economics
• Labor Market Equilibrium
  
• Labor Market
• Labor Market Equilibrium
• Labor Market Efficiency
• Price, Supply, and Demand in the Labor Market
• Equilibrium Wage
• Shifts in the Demand for Labor
• What Causes Shifts in the Supply Labor?
• How Technology affects Demand for Labor?
• Minimum Wage as a Price Floor in the Labor Market
• What is the First Rule of Labor Markets?
• Labor Demand in Perfectly Competitive Markets
• Imperfect Competition in Labor Markets
• Monopsony
• Oligopsony
• Labor Market Power of Employers
• What is the marginal Cost of Labor?
• Labor Market Power of Employees
• What is a Bilateral Monopoly in a Labor Market?
• Wage Elasticity of Labor Supply
• Equilibrium in Supply and Demand in Labor Markets
• Shifts in Supply and Demand in Labor Markets