Monopsony power with variable effort
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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- 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.
- Mortensen, Dale T. & Pissarides, Christopher A., 1999.
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Handbook of Labor Economics,
in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627
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CEP Discussion Papers
dp0183, Centre for Economic Performance, LSE.
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- 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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- John Kennan, 1995.
"The Elusive Effects of Minimum Wages,"
Journal of Economic Literature,
American Economic Association, vol. 33(4), pages 1950-1965, December.
- Manning, Alan, 1995.
"How Do We Know That Real Wages Are Too High?,"
The Quarterly Journal of Economics,
MIT Press, vol. 110(4), pages 1111-25, November.
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