Cambridge International as and a level Economics Ebook

211
Chapter 8: Government microeconomic intervention

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Evidence suggests that employees are more motivated 
and that there is less absenteeism where a living wage is 
being paid. Staff retention also improved. Th
e living wage, 
however, is not the answer to poverty – it is just part of a 
package of measures including a range of benefi ts designed 
to improve the standing of those who are most vulnerable.
Monopsony in the labour market
A 
monopsony
occurs when there is a single or dominant 
buyer, in this case of labour. Th
e monopoly buyer is able 
to determine the price that is paid for the services of the 
workers that are employed. Unlike other labour market 
examples we have looked at, in this situation we are now 
dealing with an imperfect rather than competitive market.
Monopsony: 
where there is a single buyer in a market.
KEY TERM
Figure 8.20 
shows how the monopsonist can aff ect the 
market equilibrium. Th
e monopsonist will hire workers 
by equating the marginal cost paid to employ a worker 
with the marginal revenue product gained from this 
employment. Th
is is the profi t-maximising position. 
Th
e wage that the monopsonist pays to hire labour is 
W
m
. Th
is is actually below the wage that should be paid if 
they were paying the full value of their marginal revenue 
product, that is 
W
mrp
. Th
e level of employment is 
L
m
.
In this situation the power of the employer in the labour 
market is of overriding importance and the employer can 
set a low wage because of this buying power. Monopsonists 
oft en exist in local labour market situations, for example 
where there is just one major employer in a town or where 
workers may be employed in an extractive industry located 
well away from where they normally live. In this way the 
employer dominates the labour market, setting down wages 
and all other conditions of employment.