which the monopsony wage is and employment is As in our
analysis of Figure 14-5 , the monopsonist is using its market power to
keep wages and employment below their competitive levels. If a
minimum wage of is then introduced, the firm is obliged to increase
the wage to for all its workers. You might imagine that the firm would
keep its employment unchanged at but this is incorrect. Given the
legal constraint of paying to all its workers, the marginal cost of any
extra worker up to is just (below the MC curve shown), and this is
below the workers’ MRP. The profit-maximizing monopsonist facing a
minimum wage of therefore increases employment up to It goes no
further because to do so would involve raising the wage above for
its workers, at which point the marginal cost of an extra worker would be
given by the MC curve, well above the MRP of the extra worker.
Increases in the minimum wage above will lead to further increases in
employment (upward along the labour supply curve) until the
competitive outcome is reached at and If the legislated minimum
wage rises above the competitive wage, employment will begin to
decline, although for small wage increases the level of employment will
remain above the monopsony outcome. Only for increases in the
minimum wage above will employment decline below its monopsony
level.
Evidence on the Effects of Minimum Wages
Empirical research on the effects of minimum-wage laws reflects these
mixed theoretical predictions. There is some evidence that people who
w 1 L 1.
w 2
w 2
L 1
w 2
L 2 w 2w 2 L 2.
w 2w 2w∗ L∗.w 3