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Monopsony Power with Variable Effort

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  • Frank Walsh

    (University College Dublin)

Abstract

A monopsony model of the labour market is developed where wages and the effort level are chosen by the firm. Higher wages raise labour supply while higher effort reduces it. Wages will be below the socially optimal level while effort will be too high. Under a sufficient condition which is satisfied in many reasonable cases a minimum wage policy (with the effort level unrestricted) will lower worker utility and welfare. Under a sufficient condition a maximum effort level (with wages unrestricted will raise employees utility but lower welfare. To be confident that regulatory policies improve welfare the government must be confident that it can choose and enforce the regulated levels of wages and effort correctly. By contrast an employment subsidy which depends only on the slope of the firms labour supply curve can achieve the social optimum. The model can be thought of as a generic monopsony model where wage is input price, effort input quality and workers utility the input suppliers profit. A simplified version of Bhaskar and To’s (1999) model is used to illustrate. The cost of the employment subsidy which achieves the social optimum (and is equal to the transport costs of the marginal worker) is equal to monopsony profits.

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File URL: http://www.ucd.ie/economics/research/papers/2000/WP00.23.pdf
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200023.

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Length: 26 pages
Date of creation: 17 Nov 2000
Date of revision:
Handle: RePEc:ucn:wpaper:200023

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  1. Alan Manning, 1994. "How do we Know that Real Wages are Too High?," CEP Discussion Papers dp0195, Centre for Economic Performance, LSE.
  2. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  3. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
  4. Dickens, R & Machin, S & Manning, A, 1999. "The effects of minimum wages on employment: Theory and evidence from Britain," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  5. John Kennan, 1995. "The Elusive Effects of Minimum Wages," Journal of Economic Literature, American Economic Association, vol. 33(4), pages 1950-1965, December.
  6. V. Bhaskar & Ted To, 1996. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Labor and Demography 9603001, EconWPA, revised 21 May 1996.
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