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A Generalised Model of Monopsony

  • Alan Manning

Recent research in labour economics (e.g. the work of Card and Krueger, 1995, on the impact of minimum wages) has led to renewed interest in the appropriate model to use when thinking about the labour market. But, the standard textbook models of both perfect competition and monopsony are both implausible, though for different reasons. The competitive model because it assumes the wage elasticity of the supply of labour to the individual firm is infinite and the monopsony model because it assumes that an employer cannot do anything to raise employment other than raise the wage. This paper presents a more general but very simple model in which the employer can also raise employment by increasing expenditure on recruitment. Using this, it is shown how that division between perfect competition and monopsony is not the issue of whether the wage elasticity in labour supply is infinite or finite (as it is usually presented) but whether there are diseconomies of scale in recruitment. Using a unique British data set containing information on both labour turnover costs and the number of recruits, we present estimates that do suggest that there is an increasing marginal cost of recruitment.

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File URL: http://cep.lse.ac.uk/pubs/download/DP0499.pdf
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0499.

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Date of creation: Jul 2001
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Handle: RePEc:cep:cepdps:dp0499
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Douglas O. Staiger & Joanne Spetz & Ciaran S. Phibbs, 2010. "Is There Monopsony in the Labor Market? Evidence from a Natural Experiment," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 211-236, 04.
  2. Stephen Nickell & Patricia Jones & Glenda Quintini, 2002. "A Picture of Job Insecurity Facing British Men," Economic Journal, Royal Economic Society, vol. 112(476), pages 1-27, January.
  3. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
  4. Simon Burgess & Helene Turon, 2000. "Unemployment dynamics, duration and equilibrium: evidence from Britain," LSE Research Online Documents on Economics 20162, London School of Economics and Political Science, LSE Library.
  5. Stephen Nickell & Glenda Quintini, 2001. "Nominal Wage Rigidity and the Rate of Inflation," CEP Discussion Papers dp0489, Centre for Economic Performance, LSE.
  6. Stephen Nickell & John Van Reenen, 2001. "Technological Innovation and Performance in the United Kingdom," CEP Discussion Papers dp0488, Centre for Economic Performance, LSE.
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