Wednesday, 21 January 2009

Labour Market Imperfections: Trade Union & Monopsony

A Trade Union is an organisation of workers that attempt to improve the working conditions, real income, and job security of its workers by using the collective bargaining power of the workforce in the labour market.

As you can see in the diagram above, closed shop trade unions can withhold their workforce until their demands are met, and can demand the wages of workers W1 - this creates perfectly elastic supply curve, i.e. no worker will work for other wage apart from W1. The supply of labour at W1 is E3 - more workers are willing and able to supply their skills. However, the demand for labour (MRP) at W1 is only E2 - this creates excess supply of labour (unemployment). The effective supply curve is shown in bold blue. It is "kinked" because in order to encourage more workers (above quantity E3) the real wage rate will have to be increased in order to raise the number of workers who are willing and able to supply their skills.

A Monopsony is a single employer of labour in a market and obviously has the market buying power when they are actively looking for new employees, and can use that buying power to drive down wages. Good examples are the Indian Rail, Chinese Army and the NHS (the biggest employer in the world with 1.3million).
[Times Online]

With the monopsony diagram, it is important to follow accurate analysis. The reason why MC are greater than AC is that the monopsonist MUST pay the same wage to all workers. E.g. in order to employ additional worker the firm must increase the real wage for that additional worker and also increase the real wage rate paid to all previously employed workers, thus the MC of employing additional Nth worker is always greater in monopsony.

The number of workers employed by a monopsonist is determined by MC = MRP (1); the quantity demanded is therefore Qm (2); in order to secure Qm quantity of workers the firm must pay a wage of Wm (3,4).

When compared to a Perfectly Competitive Labour Market (W ' L '), the Monopsonist pays lower real wage and employs less workers.

This is why we often see strong Trade Union presence (unionisation of the supply) in a Monopsony. The Trade Union is said to counter-balance the power of monopsony which will increase the real wage and employment as shown by the diagram below.

In this diagram, the real wage level (Wtu+m) and the quantity of labour emplyed (Qtu+m) is the outcome of the "fight" between Trade Unions and Monopsonist employer.

Further Reading :

Trade Union and Monopsonist Employers
-click here.

Labour Market - Explaining Wage Differentials - PPT Show
-click here.

Wage Determination in Competitive Markets
-click here.

Exam Questions

Explain how the wage rate is determined in a competitive labour market.
(20 marks)

Explain how trade unions are able to influence wages.
(20 marks)

Evaluate the view that trade unions raise wage rates but reduce levels of employment.
(30 marks)

For more past papers visit the department's intranet pages.



  1. Good work Elis, it just needed the clarity - especially with diagrams. Looking forward to seeing your next submission.

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