Labour Market Imperfections

• Labour markets are not perfectly competitive due to imperfections such as monopsony power and trade unions.
• A monopsonist is a single buyer of labour in a market.
• Monopsony power can be seen on a local scale with a regional firm employing all workers in an area, or on a national scale with the NHS employing doctors in the UK.
• The average cost of employing labour is equal to the wage rate in a perfectly competitive market.
• A monopsonist needs to increase the wage rate for all workers in order to attract additional workers, leading to a steeper rise in marginal cost compared to average cost.
• A monopsonist employs workers up to the point where marginal cost of labour equals marginal revenue product to maximize profits.
• In a monopsony labour market, fewer workers are employed and they are paid lower wages compared to a perfectly competitive market.
• Trade unions are associations of workers that negotiate and bargain with employers on a collective basis to protect workers’ interests.
• Trade unions can counterbalance monopsony power and increase wages through collective bargaining, but it may lead to unemployment in a competitive market.
• Trade unions can increase pay and improve working conditions, benefiting both employers and employees by increasing motivation and productivity.
• However, trade unions can also lead to unemployment, distort market processes, and potentially cause inflationary pressure. They may also resist technological advancements, reducing productivity.

This module discusses the imperfections in labor markets, specifically focusing on monopsony power and trade unions. A monopsonist is a single buyer of labor, such as a large regional firm or the NHS employing doctors in the UK. In a perfectly competitive market, the average cost of labor is equal to the wage rate and the supply curve for labor is upward sloping. However, in a monopsony, the monopsonist must increase the wage rate for all workers in order to attract additional workers, causing the marginal cost to rise twice as steeply as the average cost. This leads to a different outcome in the labor market, where the monopsonist employs fewer workers and pays them a lower wage compared to a perfectly competitive market. Trade unions, on the other hand, aim to counterbalance monopsony power by negotiating higher wages and better working conditions for their members. In a competitive labor market, trade unions can push wages above the equilibrium level, resulting in a decrease in the quantity of labor demanded and an increase in the quantity of labor supplied. However, in a bilateral monopoly situation where both a trade union and a monopsonist are present, the introduction of a trade union can actually increase employment levels while raising wages. The impact of trade unions on employment and wages depends on the specific wage negotiated. If the wage is set too high, it may lead to a reduction in employment even in a monopsony market.