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BULL14
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Explain what is meant by ‘monopsonistic demand for labour’ and analyse how a trade union can influence wages & employment levels in an imperfectly competitive labour market (10 marks)

A monopsony is a sole-buyer in the market. This makes the monopsony labour market an imperfect market. In labour markets, such as the NHS, the monopsony is the sole or dominant employer. In the case of a perfect monopsony, this means the demand for labour is determined by how much the monopsony wants to demand at particular wage rate.This can be depicted by figure 1.
Figure 1

The monopsonist’s level of employment is determined by the point where MRP=MC. This is the point of profit maximisation. In a perfectly competitive market, the wage rate should be at the point W1. However, in a monosomy Q2 workers should be willing to work for an hourly wage of W2. Unlike in a perfectly competitive market (where wages are W1 and labour supply Q1), the wage may be lower than the MRP of labour. This makes the monopsony the wage maker.


A trade union is an organisation formed to represent the interests of a group of workers e.g. NUT & BMA. The purpose of trade unions is to employ collective bargaining to improve conditions for work & wage rates. When trade unions enter monopsonistic labour markets it is an example of a bilateral monopoly. This is where there is a single buyer & a single seller. Figure 2 illustrates how trade unions may increase the wage rate in a monosomy.

Figure 2
W2 is the wage rate monopsonist would have paid workers without the union. Theoretically, the presence of a union should increase wages up to W1. Assuming firms pay wage rates agreed by trade unions. This now means that the profit maximising level of workers is where the horizontal line from W1 (new marginal cost curve) intersects MRP. Therefore, the no. workers employed increases from Q2 to Q1.



The union has thus managed to increase both, wages and employment, in the monopsony.

Figure 1
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Figure 2
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