Appendix: Imperfect Labor Markets

Appendix

Imperfect Labor Markets

After studying the appendix you should be able to:

  • Explain why market power allows a firm to benefit from the labor market.
  • Define a monopsony and explain how it affects wages in the labor market.
  • Explain why imperfect labor markets are less efficient than competitive input (labor) markets.

In the world as we know it, markets are not perfectly competitive. Product markets and labor markets contain monopolistic and oligopolistic elements. In many product markets, a few firms control the bulk of market share. They may not be monopolies, but they do have some market power, through brand loyalty if nothing else.

monopsony A labor market with one employer.

Similarly, in most communities, there is only one government hiring firefighters and police officers. When the market contains only one buyer of a resource, economists refer to this lone buyer as a monopsonist. Monopsony power, meanwhile, is the control over input supply that the monopsonist enjoys. Before we look at the impact of monopsony on the labor market, let us first consider monopoly power in the product market.