Imperfectly competitive labor markets can seriously impact workers. When employers have too much power, they can pay lower wages and hire fewer people than in a fair market. This creates problems for workers and the economy.

Understanding these markets helps us see why some jobs pay less than they should. It also shows how having more job options and employers can lead to better wages and more opportunities for workers.

Imperfectly Competitive Labor Markets

Labor Market Power

• Employers with monopsony power face upward-sloping labor supply curve
  • Must increase wages to attract additional workers (higher labor costs)
  • Marginal cost of labor exceeds wage rate (MCL > w)
• Profit-maximizing employment where marginal revenue product equals marginal cost of labor
  • $MRP = MCL$
• Wage determined by labor supply curve at profit-maximizing employment
  • Wage lower than MRP and competitive wage (exploitation)

Monopsony Impact

• Monopsony leads to lower wages vs. competitive market
  • Employer pays wage below MRP (labor exploitation)
• Monopsony results in lower employment vs. competitive market
  • Employer hires fewer workers to suppress wages (underemployment)
• Monopsony creates deadweight loss
  • Workers willing to work at competitive wage not hired (inefficiency)
  • Marginal benefit of labor exceeds marginal cost (allocative inefficiency)

Competitive vs. Monopsony

• Competitive markets
  • Many employers and workers, no individual employer influences wage
  • Employers are wage-takers, perfectly elastic labor supply (horizontal)
  • Wage equals MRP of labor (efficiency)
• Monopsony markets
  • One or few employers dominate, significant market power
  • Employers face upward-sloping labor supply (rising labor costs)
  • Employers set wages below MRP of labor (exploitation)
• Wage and employment differences
  • Competitive: Higher wages and employment (efficiency)
  • Monopsony: Lower wages and employment (exploitation, inefficiency)