class: center, middle, inverse, title-slide # Monopsony ## EC 350: Labor Economics ### <a href="https://kyleraze.com">Kyle Raze</a> ### Winter 2022 --- # Peri et al. (2020) ## **Discussion** **Q.sub[1]:** What natural experiment did the authors use to measure the effect of immigration on wages and employment? Did you find it compelling? **Q.sub[2]:** What did the authors find? **Q.sub[3]:** Do you think their estimates are externally valid? **Q.sub[4]:** What are the implications for immigration policy? --- class: inverse, middle # Monopsony --- # Monopsony A **monopsony is a market** with a single buyer. - In a labor market, this would entail that there is only one employer, which we call a **monopsonist**. -- **Why does this matter?** Monopsonies are inefficient! - In a monopsonistic labor market, workers **earn less** and there is **underemployment**. - Can exacerbate inequality! -- Most labor markets are probably closer to monopsony than to perfect competition. - Employers with significant **market power**? Probably the norm rather than the exception. --- # Monopsony ## **Discussion** **Q:** Is Amazon a monopsonist? Why or why not? **Q:** Do large public research universities have monopsony power? **Q:** Is a sawmill in Eastern Oregon a monopsonist? What about a sawmill in Eugene? --- # Monopsony ## **Assumptions** We will continue to make most of the same assumptions as we did when we modeled supply and demand for a competitive market. - Perfect competition in capital and output markets - Homogeneous workers within a market - Various assumptions about preferences and production technology - Perfect information and complete contracts -- We will now assume that there is **only one employer** whose hiring decisions can influence the market wage..super[.hi-pink[<span>†</span>]] .footnote[.super[.hi-pink[<span>†</span>]] We are still implicitly assuming that there is a single wage—the employer cannot "discriminate" by offering different wages to different workers.] --- # Labor supply elasticity ## **Definition** > A measure of the responsiveness of the quantity of labor supplied to changes in the wage > `$$\sigma = \dfrac{\text{% change in quantity of labor supplied}}{\text{% change in wage}}$$` -- **Interpretation?** A one-percent increase in wages increases the quantity of labor supplied by `\(\sigma\)` percent. - `\(\sigma > 1\)` .mono[==>] labor supply is .pink[elastic] or .pink[sensitive] to changes in the wage. - `\(0 \leq \sigma < 1\)` .mono[==>] labor supply is .pink[inelastic] or .pink[insensitive] to changes in the wage. --- # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ### .pink[Perfectly elastic labor supply] Quantity of labor supplied falls to zero when the wage decreases and approaches infinity when the wage increases. `\(\sigma\)` .mono[->] `\(\infty\)` ] --- # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ### .pink[Perfectly inelastic labor supply] Quantity of labor supplied does not change when the wage changes. `\(\sigma = 0\)` ] --- # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ *All else being equal*, flatter supply curves are .pink[more elastic] than steeper supply curves. As `\(\sigma\)` decreases, the same wage increase leads to smaller increases in the quantity of labor supplied. ] --- count: false # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ *All else being equal*, flatter supply curves are .pink[more elastic] than steeper supply curves. As `\(\sigma\)` decreases, the same wage increase leads to smaller increases in the quantity of labor supplied. ] --- count: false # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ *All else being equal*, flatter supply curves are .pink[more elastic] than steeper supply curves. As `\(\sigma\)` decreases, the same wage increase leads to smaller increases in the quantity of labor supplied. ] --- count: false # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ *All else being equal*, flatter supply curves are .pink[more elastic] than steeper supply curves. As `\(\sigma\)` decreases, the same wage increase leads to smaller increases in the quantity of labor supplied. ] --- count: false # Labor supply elasticity .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ *All else being equal*, flatter supply curves are .pink[more elastic] than steeper supply curves. As `\(\sigma\)` decreases, the same wage increase leads to smaller increases in the quantity of labor supplied. ] --- # Monopsonist *vs.* competitive employer Workers have few employment opportunities in a monopsonistic labor market. <br> `\(\quad\)` .mono[-->] A monopsonist faces the labor supply curve for the entire market. .pull-left[ .center[**Monopsonist**] <img src="11-Monopsony_files/figure-html/unnamed-chunk-8-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ .center[**Perfectly competitive employer**] <img src="11-Monopsony_files/figure-html/unnamed-chunk-9-1.svg" style="display: block; margin: auto;" /> ] --- # Monopsonist *vs.* competitive employer Workers have more employment opportunities in a competitive labor market. <br> `\(\quad\)` .mono[-->] Individual employers face flat supply curves. .pull-left[ .center[**Monopsonist**] <img src="11-Monopsony_files/figure-html/unnamed-chunk-10-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ .center[**Perfectly competitive employer**] <img src="11-Monopsony_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" /> ] --- # Profit maximization ## **Perfect competition** A competitive employer maximizes profit by hiring `\(E^*\)` workers such that `\(w = \text{VMP}_E\)` and `\(\text{VMP}_E\)` is decreasing. - The employer keeps hiring until the **marginal cost** of the last worker equals the **marginal benefit** of the last worker. -- ## **Monopsony** A monopsonist maximizes profit maximizes profit by hiring `\(E^*\)` workers such that `\(\text{MC}_E = \text{VMP}_E\)` and `\(\text{VMP}_E\)` is decreasing. - **The difference?** Marginal cost is no longer equal to the wage—the monopsonist has increase the wage to attract additional workers *and* pay this new wage to existing workers. --- class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 285 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 285 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 285 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 285 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 105 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> </td> </tr> </tbody> </table> --- count: false class: clear-slide **Q:** Given supply and demand for labor, how many workers would a monopsonist hire? <table> <thead> <tr> <th style="text-align:center;"> Workers (E) </th> <th style="text-align:center;"> VMP (demand) </th> <th style="text-align:center;"> Wage (supply) </th> <th style="text-align:center;"> Wage × E </th> <th style="text-align:center;"> Marginal cost </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 80 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 70 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 85 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 120 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 90 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 180 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 95 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 285 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 105 </td> </tr> <tr> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 50 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 100 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td> <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 115 </td> </tr> </tbody> </table> -- **A:** A monopsonist would hire 2 workers. - As close to `\(\text{MC}_E = \text{VMP}_E\)` as the employer can get. -- **Q:** How many employees would a perfectly competitive employer hire? -- **A:** A perfectly competitive employer would hire 3 workers. - Where `\(w = \text{VMP}_E\)`. --- # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-21-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! - **Step 1:** Hire E.sub[M] where .green[MC.sub[E]] .mono[=] .purple[VMP.sub[E]]. ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-23-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! - **Step 1:** Hire E.sub[M] where .green[MC.sub[E]] .mono[=] .purple[VMP.sub[E]]. ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-24-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! - **Step 1:** Hire E.sub[M] where .green[MC.sub[E]] .mono[=] .purple[VMP.sub[E]]. - **Step 2:** Set w.sub[M] on the .pink[supply curve]. ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-25-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! - **Step 1:** Hire E.sub[M] where .green[MC.sub[E]] .mono[=] .purple[VMP.sub[E]]. - **Step 2:** Set w.sub[M] on the .pink[supply curve]. ] --- count: false # Profit maximization .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-26-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Q:** How does a monopsonist maximize profit? **A:** Two steps! - **Step 1:** Hire E.sub[M] where .green[MC.sub[E]] .mono[=] .purple[VMP.sub[E]]. - **Step 2:** Set w.sub[M] on the .pink[supply curve]. The point (E.sub[M], w.sub[M]) characterizes the monopsony equilibrium. ] --- # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-27-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ In a perfectly competitive market, the point<br>(E.sub[C], w.sub[C]) characterizes the market equilibrium. In a monopsony, the point (E.sub[M], w.sub[M]) characterizes the market equilibrium. ] --- count: false # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-28-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ In a perfectly competitive market, the point<br>(E.sub[C], w.sub[C]) characterizes the market equilibrium. In a monopsony, the point (E.sub[M], w.sub[M]) characterizes the market equilibrium. **The takeaway?** Monopsonies generate lower wages and less employment than competitive markets. - **Q:** Why does this matter? ] --- # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-29-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Welfare analysis** **Total surplus** describes **mutual gains** from employment. - Workers experience monetary benefits from working (.pink[worker surplus]). - Employers experience monetary benefits from hiring (.purple[employer surplus]). - Total surplus .mono[=] .pink[worker surplus] .mono[+] .purple[employer surplus]. ] --- # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-30-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Welfare analysis** **Total surplus** describes **mutual gains** from employment. A perfectly competitive market **maximizes** total surplus! ] --- # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-31-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Welfare analysis** **Total surplus** describes **mutual gains** from employment. A monopsony **fails to maximize** total surplus! - .orange[Deadweight loss (DWL)] represents unrealized mutual gains from employment. A monopsony **transfers** surplus **from workers to employers.** ] --- count: false # Perfect competition *vs.* monpsony .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-32-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Welfare analysis** **Total surplus** describes **mutual gains** from employment. A monopsony **fails to maximize** total surplus! - .orange[Deadweight loss (DWL)] represents unrealized mutual gains from employment. A monopsony **transfers** surplus **from workers to employers.** ] --- # Wage markdown .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-33-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ The **wage markdown** is the difference between VMP.sub[M] and w.sub[M]. - The marginal worker is paid less than than her marginal contribution to the firm! ] --- count: false # Wage markdown .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-34-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ The **wage markdown** is the difference between VMP.sub[M] and w.sub[M]. - The marginal worker is paid less than than her marginal contribution to the firm! The size of this markdown depends on the elasticity of labor supply. - As `\(\sigma\)` increases, the markdown decreases. ] --- count: false # Wage markdown .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-35-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ The **wage markdown** is the difference between VMP.sub[M] and w.sub[M]. - The marginal worker is paid less than than her marginal contribution to the firm! The size of this markdown depends on the elasticity of labor supply. - As `\(\sigma\)` increases, the markdown decreases. ] --- count: false # Wage markdown .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-36-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ The **wage markdown** is the difference between VMP.sub[M] and w.sub[M]. - The marginal worker is paid less than than her marginal contribution to the firm! The size of this markdown depends on the elasticity of labor supply. - As `\(\sigma\)` increases, the markdown decreases. ] --- count: false # Wage markdown .pull-left[ <img src="11-Monopsony_files/figure-html/unnamed-chunk-37-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ The **wage markdown** is the difference between VMP.sub[M] and w.sub[M]. - The marginal worker is paid less than than her marginal contribution to the firm! The size of this markdown depends on the elasticity of labor supply. - As `\(\sigma\)` increases, the markdown decreases. ] --- # Perfect competition *vs.* monpsony .pull-left[ ## **Perfect competition** 1. Many employers 2. Each employer is a **price taker** in the labor market—the hiring decisions of an employer have no impact on the market wage<br>.mono[-->] no market power! 3. The marginal worker receives a wage **equal to** the value of her marginal product. 4. Efficient! ] .pull-right[ ## **Monopsony** 1. One employer 2. Monopsonist is a **price maker** in the labor market—the hiring decisions of this employer affect the market wage<br>.mono[-->] significant market power! 3. The marginal worker receives a wage **less than** the value of her marginal product. 4. Inefficient! ] --- # Policy implications? **Q:** If monopsonistic labor markets are inefficient and perhaps inequitable, what can we do about it? - Perhaps we should extend anti-trust laws to employers? - Increase the minimum wage? - Unions? - Something else? --- # Housekeeping **Assigned reading for Wednesday:** [Labor Market Concentration](http://jhr.uwpress.org/content/early/2020/05/04/jhr.monopsony.1218-9914R1.abstract) by Jose Azar, Ioana Marinescu, and Marshall Steinbaum (2020). - Reading Quiz 6 is due by **Wednesday, February 16th at 12:00pm (noon)**. - The quiz instructions describe the sections I want you to read closely.