Minimum wages are predicted to reduce employment in competitive
labour markets; the predicted effects on employment in monopsonistic
labour markets are less clear. Part (i) shows a competitive labour market
with the competitive equilibrium at and A binding minimum wage
raises the wage to Firms respond by reducing employment to
The quantity of labour supplied by workers increases to
Unemployment is equal to workers.
Part (ii) shows a labour market in which firms behave as a monopsonist.
The monopsony equilibrium is and. If the minimum wage is set at
employment will rise to (because each extra worker between
and costs but has a higher MRP). If the minimum wage is set as
high as the competitive wage employment rises to the competitive
level But if the minimum wage rises above employment will fall
below If the minimum wage were set above employment would
fall below the monopsony level,
Firms with Monopsony Power
Our theory predicts that the minimum-wage law can simultaneously
increase both wages and employment in markets in which firms have
monopsony power. To understand this result, consider Figure 14-6
w∗ L∗.
wmin. L
L 2.
L 1 L 2
w 1 L 1
w 2 , L 2
L 2 W 2
w∗,
L∗. w∗,
L∗. w 3 ,
L 1.