Minimum Wages, Unions, and Monopsony
Institutions shape wage setting
The competitive model treats each worker and firm as too small to set the wage. Real labor markets often include legal wage floors, collective bargaining, long contracts, and employers with hiring power. These institutions can change both how income is divided and how much labor is employed.
Minimum wages in a competitive benchmark
A minimum wage is a legal floor below which covered workers cannot be paid. If it lies below equilibrium, it is nonbinding and changes neither wage nor employment. If it lies above competitive equilibrium, the simple model predicts more labor supplied, less labor demanded, and a labor surplus.
The size of any employment loss depends on elasticities, compliance, hours, prices, productivity responses, and adjustment time. Evidence may differ across places and policy levels, so “a minimum wage always destroys jobs” is too broad.
Unions and bargaining
A union bargains collectively over wages, benefits, safety, hours, and grievance procedures. It may raise compensation by increasing worker bargaining power, limiting labor supply, or helping firms communicate and retain staff. Higher negotiated wages can reduce employment in some settings, but lower turnover and better cooperation may raise productivity.
The outcome depends on bargaining power and the alternatives available to each side. Union wage premiums also need to be compared with dues, coverage, job security, and who gains access to union jobs.
Monopsony
A monopsony is a labor market in which an employer has wage-setting power because workers have few good alternatives or face moving and search costs. To attract another worker, the employer may need to raise the wage for existing workers too. Therefore the marginal factor cost of labor can exceed the wage paid to the additional worker.
The monopsonist hires where is approximately equal to , then pays the wage on the labor-supply curve. Compared with competition, this produces lower employment and a lower wage.
Monopsony policy crisis board
You chair crisis meetings in a one-employer town. A wage floor initially makes covered labor units available at a constant wage, so changes in total labor cost determine MFC; an excessive wage still runs into labor demand.
Choose the first policy. Intervention spends political mandate; the crisis shock is revealed only after enactment.
Worked schedule
Suppose hiring one, two, or three workers requires wages of 30, and 20, 120, so MFC is 40, and 90, 45, the firm hires two: the third worker's MRP is below the 30 each, not the $40 marginal factor cost.
A surprising wage-floor result
In monopsony, a moderate minimum wage can raise both wages and employment. By allowing the firm to hire several workers at a fixed legal wage, the floor can lower marginal hiring cost over that range. Employment moves toward the competitive level until the floor becomes so high that ordinary labor demand limits hiring.
This does not mean every labor market is a pure monopsony or every floor raises employment. Employer concentration, worker mobility, job differentiation, enforcement, and the exact policy level all matter.
KNOWLEDGE QUIZ
Audit a hospital's hiring power
Use a discrete monopsony schedule to compare unregulated hiring, a moderate wage floor, and an excessive wage floor.
- Calculate total labor cost and marginal factor cost for each employment level.
- Find the hospital's unregulated employment and wage using MRP versus MFC.
- Find employment under wage floors of $70 and $105, treating the floor as a constant marginal cost until labor supply becomes binding.
- Compare worker earnings and explain why the employment effect of a wage floor depends on market structure and its level.
Hospital schedule
Nurses employed: 1 2 3 4 5
Supply wage: 40 50 60 70 80
MRP: 130 110 90 70 50Wage institutions affect who receives market income. The next section widens the lens from workers and firms to the distribution of income across an entire population.