Raise the minimum wage and employment falls — the textbook verdict, true in a competitive market. But when one employer dominates a town’s hiring, it flips: a wage floor can lift pay and employment together. This page builds the monopsony model behind that reversal, the topic that most often brings intermediate students to an economics tutor in Nottingham.
1 · Why one employer faces an upward-sloping supply curve
In a competitive labour market every firm is a wage-taker, hiring all it wants at the going wage — its labour supply is flat. Monopsony is the opposite. When one employer does most of the local hiring — the only cannery in an isolated town, the only hospital for fifty miles — it faces the whole market’s upward-sloping supply curve, and must raise the wage to hire more. Three things give it that power: it is the dominant local buyer, workers face real costs to move, and jobs are differentiated.
Monopsony is monopoly turned around: a monopolist’s marginal revenue sits below demand, a monopsonist’s marginal cost of labour sits above supply — the same wedge on the buying side, the seller-side case being the monopoly deep-dive. The upward curve here is the market labour supply facing the firm, from each worker’s income–leisure choice, covered separately.
2 · The marginal cost of labour lies above supply
Take a linear supply curve w = a + bL. To hire one more worker the firm must raise the wage — and pay it to everyone, not just the new hire. So an extra worker costs their own wage plus the raise owed to the whole workforce, and the marginal cost of labour, MCL, climbs faster than supply. Differentiate the wage bill wL = (a + bL)L: MCL = a + 2bL — same intercept as supply, twice the slope. It is the exact mirror of a monopolist’s marginal revenue falling twice as fast as demand, on the buying side.
3 · The monopsony equilibrium, the markdown, and the deadweight loss
The firm’s labour demand is the marginal revenue product, MRPL — the revenue the next worker’s output adds. A profit-maximiser hires while a worker adds more to revenue than to cost, stopping where MCL = MRPL. That condition fixes employment, not the wage. The wage is whatever attracts that many workers, read straight down to the supply curve — and because supply lies below MCL, it lands below the worker’s marginal product. That gap is the wage markdown, buyer power made visible, the counterpart of a monopolist’s price above marginal cost.
It is not only distributional. A competitive market would hire more at a higher wage, so the workers left unhired though worth more than they cost are a deadweight loss — the triangle between MRPL and supply that the worked example measures.
4 · The minimum wage that raises employment
In a competitive market a binding wage floor sits above equilibrium and cuts employment — the standard price-floor result. Under monopsony that breaks, and the reversal is this page’s centrepiece.
Set a floor between the monopsony and competitive wages. Over the workers willing to work at it, the floor sets pay, so hiring one more costs just the floor wage — no raise for anyone else. The marginal cost of labour goes flat at the floor. That removes the firm’s reason to hold hiring down: expanding no longer bids up the whole wage bill, so it hires out along its demand curve toward the competitive level. Employment rises.
The gain lives in a window. Below the monopsony wage a floor is slack; above the competitive wage the old story returns — a higher floor cuts jobs as in any competitive market. How far real markets behave this way is contested: the well-known fast-food minimum-wage studies are read both as evidence of employer power and against it, and the size of the effect stays debated. The model gives the mechanism, not a settled magnitude.
Worked example — the only cannery in a remote coastal town
A cannery, the only large employer in an isolated town, faces labour supply w = 4 + 2L and demand MRPL = 28 − 2L (w in £/hour, L in hundreds).
Step 1 — Marginal cost of labour. The wage bill is wL = (4 + 2L)L = 4L + 2L². Differentiate: MCL = 4 + 4L — same £4 intercept as supply, twice the slope.
Step 2 — The monopsony hire. Set MCL = MRPL: 4 + 4L = 28 − 2L, so 6L = 24 and L = 4 (four hundred workers).
Step 3 — Wage and markdown. Read the wage down to supply: w = 4 + 2(4) = £12, while the last worker’s product is MRPL = 28 − 8 = £20 — an £8 markdown, the wage just 60% of marginal product. A competitive market would hire at L = 6, w = £16; the two hundred unhired workers between form a deadweight-loss triangle of area ½ × 2 × £8 = £8.
Step 4 — Impose a £14 minimum wage. It sits above the monopsony £12, below the competitive £16. The cannery can now hire anyone willing to work at £14 without bidding pay up, so MCL is flat at £14 up to where supply reaches it: 4 + 2L = 14 gives L = 5.
Step 5 — New employment. Along that flat stretch MRPL exceeds £14 (at L = 5 it is £18), so each worker adds more than they cost — hire them. Past L = 5, MCL jumps onto the steep curve to £24, above the £18 produced. Stop, at L = 5 (five hundred workers).
Step 6 — Interpret. The floor lifted the wage (£12 → £14) and employment (400 → 500) together: flattening the marginal cost of labour removed the incentive to restrict hiring. In a competitive market the same floor would cut jobs.
Given a labour supply curve and a marginal revenue product, could you find the monopsony wage — and the exact window of minimum wages that would raise employment rather than cut it? Deriving the marginal cost of labour and the floor that lifts pay and jobs together, rather than reciting that monopsony can do it, is exactly what labour-market questions reward. A one-on-one economics tutor builds the MCL = MRPL equilibrium with you until the wage markdown and the minimum-wage reversal are results you derive, not claims you repeat. Book a trial session.
Practice
Q1. A single-employer town has supply w = 6 + L and demand MRPL = 30 − 2L (£/hour, L in hundreds). Find MCL, the monopsony employment, wage and markdown, and the competitive employment and wage.
Q2. A £13 minimum wage is imposed there. Find employment, and say whether it rises or falls against the monopsony level.
Q3. Instead a £20 minimum wage is imposed. Find employment, and compare it with the competitive level.
Answers. Q1: MCL = 6 + 2L. Monopsony 6 + 2L = 30 − 2L gives L = 6, wage off supply w = £12, and MRPL(6) = £18 — a £6 markdown. Competitive 6 + L = 30 − 2L gives L = 8, w = £14. Q2: £13 is in the window; supply reaches it at L = 7, demand at L = 8.5, so employment is 7 — up from 6. Q3: £20 exceeds the competitive £14; demand gives L = 5, supply L = 14, so employment is 5 — below the competitive 8, the floor now cutting jobs.
Key takeaways
- Monopsony is monopoly mirrored. One dominant buyer faces an upward supply curve, so its marginal cost of labour rises twice as fast — MCL = a + 2bL — and sits above supply, as marginal revenue sits below demand.
- Hire on MCL = MRPL, pay off supply. The wage, read down to supply, lands below marginal product — that gap is the markdown.
- A minimum wage can raise employment. Between the monopsony and competitive wages, a floor flattens the marginal cost of labour and lifts both pay and jobs.
- The gain lives in a window. Below the monopsony wage a floor does nothing; above the competitive wage it cuts jobs like any price floor.
Why Nottingham students choose our economics tutoring
- Models built, not memorised: sessions derive the marginal cost of labour and solve the monopsony equilibrium from scratch, so you reproduce the minimum-wage reversal under exam pressure, not just quote it.
- The distinctions examiners test, drilled: the wage read off supply versus marginal product, the window in which a floor raises employment, monopsony versus a competitive price floor — the lines between a first and a 2:1.
- One-on-one and matched to your course: a tutor works from your own notation and past papers, whether your module follows Varian, Nicholson and Snyder, or Borjas.
FAQ
Q: What is a monopsony in simple terms?
A: A market with one dominant buyer. In labour, an employer big enough that hiring more pushes the wage up, so it faces an upward supply curve, not a flat one.
Q: Why does the marginal cost of labour lie above the supply curve?
A: Because hiring one more worker means raising the wage for everyone already employed, not just the new hire — so each new worker costs more than their own wage.
Q: How can a minimum wage increase employment?
A: A monopsonist restricts hiring to hold the wage down. A floor between the monopsony and competitive wages fixes pay, so hiring more no longer raises the whole bill, and it expands.
Q: Does a minimum wage always raise employment?
A: No. Only a floor between the monopsony and competitive wages does. Above the competitive wage it cuts employment, as in a competitive market.
Q: Is there real evidence that labour markets are monopsonistic?
A: It is debated. Some minimum-wage studies read as employer power, others push back, and the size of the effect stays contested. The model gives the mechanism, not a magnitude.
Book an economics tutor in Nottingham or online
Monopsony rewards students who can derive the marginal cost of labour and the minimum-wage reversal, not just describe them — the markdown, the deadweight loss, the window where a floor raises jobs. One-on-one sessions build that fluency on your own past papers. Tell us your course and exam date, and we will match you with the right tutor this week.
