Monopsony in the Labour Market

The competitive labour market model assumes that firms are wage-takers — they cannot influence the market wage. In reality, many labour markets are characterised by monopsony power, where one or a few employers dominate the hiring of workers. This has profound implications for wages, employment, and economic welfare.

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What Is Monopsony?

Key Definition: A monopsony is a market structure in which there is a single buyer. In the labour market, a monopsony employer is the sole (or dominant) purchaser of a particular type of labour.

The term was coined by Joan Robinson (1933) in The Economics of Imperfect Competition. Robinson demonstrated that a monopsony employer has the power to set wages below the competitive equilibrium, resulting in exploitation of workers.

Pure Monopsony vs. Monopsony Power

A pure monopsony (a single employer) is rare but not unknown:

Example	Explanation
The NHS	Employs approximately 77% of all nurses in England; by far the dominant employer of healthcare professionals
Ministry of Defence	The sole employer of military personnel
A coal mine in an isolated village (historically)	The only employer in the local area

More commonly, firms possess monopsony power — the ability to influence wages — without being the sole employer. Examples include:

• Amazon in warehouse work — dominant employer in many UK distribution areas (e.g., Rugeley, Dunfermline, Coalville)
• Tesco, Sainsbury's in retail — large employers with significant local market share
• Premier League football clubs — although there are 20 clubs, each has significant bargaining power over individual players due to restrictive contract rules
• Local authorities — often the largest employer in rural areas

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The Monopsony Model

In a monopsony labour market, the employer faces the upward-sloping market supply curve for labour (unlike a competitive firm, which faces a horizontal supply curve). This means:

1. To hire more workers, the monopsonist must raise the wage it offers.
2. Because the higher wage must (usually) be paid to all workers, not just the marginal one, the marginal cost of labour (MCL) exceeds the average cost of labour (ACL = the wage).

Numerical Example

Workers	Wage (ACL) (£)	Total Labour Cost (£)	MCL (£)
1	10	10	10
2	12	24	14
3	14	42	18
4	16	64	22
5	18	90	26
6	20	120	30

Notice that the MCL rises faster than the wage. When the firm hires the 4th worker at £16, total cost rises from £42 to £64 — an increase of £22, not £16, because the first three workers also receive the higher wage.

Equilibrium in the Monopsony Model

The monopsony employer maximises profit by hiring where:

MCL = MRP_L

The wage is then read off the supply curve (not the MCL curve) at the chosen employment level.

Compared with a competitive market:

Outcome	Competitive Market	Monopsony
Wage	W_c (higher)	W_m (lower)
Employment	L_c (higher)	L_m (lower)
Deadweight loss	None	Yes — a welfare loss triangle

The monopsonist pays a wage below MRP_L, meaning workers are paid less than their marginal contribution to revenue. Robinson called this monopsonistic exploitation.

Exam Tip: When drawing the monopsony diagram, you need four curves: the MRP_L (demand), the supply curve (= ACL), the MCL curve (above the supply curve, diverging), and optionally a horizontal line showing the competitive wage for comparison. Always label the monopsony wage (W_m), competitive wage (W_c), monopsony employment (L_m), and competitive employment (L_c).

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Sources of Monopsony Power

Source	Explanation
Geographical isolation	In rural areas or small towns, there may be only one or two major employers. Workers face high costs of commuting or relocating.
Specialised skills	Workers with highly specialised skills (e.g., nuclear engineers, military specialists) have very few alternative employers.
Imperfect information	Workers may not know about better-paid opportunities elsewhere. Job search is costly and time-consuming.
Labour market frictions	Switching costs, notice periods, non-compete clauses, pension tie-ins, and emotional attachment to colleagues reduce worker mobility.
Collusion — explicit or tacit	Firms may agree not to poach each other's workers. In 2015, several Silicon Valley tech firms (Apple, Google, Intel, Adobe) paid $415 million to settle a lawsuit alleging agreements not to recruit each other's engineers.