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Lecture 6
Matti Sarvimäki
15 Nov 2012
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition
1 Supply of labor
2 Demand for labor
3 Labor market equilibrium
1 Perfectly competitive markets; immigration
2 Imperfectly competitive labor markets; minimum wages
(today)
3 Roy model; technological change and polarization
Dollars
w*
Employment
Dollars
w−
w*
Employment
⇤
A minimum wage set at w − results in employers cutting employment from E ∗
⇤
to E − . The higher wage also encourages ES − E ∗ workers to enter the market.
−
Thus, under a minimum wage, ES − E workers are unemployed.
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition
w0
net wage
0 1
Locaon
Net wage (wage–travel cost) is w0 for someone living at 0 and less for those
living further away from 0. Given wages {w0 , w1 }, everyone to the left of
x ∗ work at firm 0 and everyone else at firm 1. When firm 0 decreses wages from
0
w0 to w0− , x ∗ − x ∗ workers change employer form 0 to 1.
31E00700 Labor Economics: Lecture 6 Matti Sarvimäki
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition
w0 w1
net wage
0 x* 1
Loca on
Net wage (wage–travel cost) is w0 for someone living at 0 and less for those
living further away from 0. Given wages {w0 , w1 }, everyone to the left of
x ∗ work at firm 0 and everyone else at firm 1. When firm 0 decreses wages from
0
w0 to w0− , x ∗ − x ∗ workers change employer form 0 to 1.
31E00700 Labor Economics: Lecture 6 Matti Sarvimäki
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition
w0 w1
net wage
0 x*’ x* 1
Locaon
Net wage (wage–travel cost) is w0 for someone living at 0 and less for those
living further away from 0. Given wages {w0 , w1 }, everyone to the left of x ∗
work at firm 0 and everyone else at firm 1. When firm 0 decreses wages from
0
w0 to w0− , x ∗ − x ∗ workers change employer from 0 to 1.
31E00700 Labor Economics: Lecture 6 Matti Sarvimäki
Profit Maximization under Oligopsony
wage
MC0
LS0
Employment
Firm maximizes profits by employing L0 workers. To get them, the firm must
pay w0 (less than the marginal product of labor denoted with the straight solid
line).
Profit Maximization under Oligopsony
wage
MC0
LS0
W0
L0
Employment
Firm maximizes profits by employing L0 workers. To get them, the firm must
pay w0 (less than the marginal product of labor denoted with the straight solid
line).
Profit Maximization under Oligopsony
wage
MC0’ MC0
LS0’
LS0
W0’
W0
L0’ L0
Employment
When a rival raises wages, the labor supply curve shifts to the left and the firm
0
now maximizes profits by reducing employment to L0 . To get them, it must
0
pay w0 , i.e. more than before, so profits decrease. This increase will not be as
large as the increase of rival’s wages (but you can’t see the last point from the
graph).
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition
R0
R0 maps firm 0’s optimal wage as a best response to wages offered by firm 1
(and R1 does the same the other way around). The equilibrium wage—where
the reaction curves cross—will be less than the marginal product of workers
(though you can’t see that from this graph).
31E00700 Labor Economics: Lecture 6 Matti Sarvimäki
Minimum Wages under Oligopsony
wage
MC0
LS0
W0
L
Employment
Minimum wages increase rival’s wages and thus push the labor supply curve
0
from LS0 to LS0 . Due to the minimum wages marginal cost of an additional
worker is fixed at wmin as long as LS0´ curve is below wmin . Thus minimum
0
wages lead the firm to increase employment from L0 to L0 and wages from w0
to wmin .
Minimum Wages under Oligopsony
wage
MC0’ MC0
LS0’
LS0
W0’
W0
L0’ L
Employment
Minimum wages increase rival’s wages and thus push the labor supply curve
0
from LS0 to LS0 . Due to the minimum wages marginal cost of an additional
worker is fixed at wmin as long as LS0´ curve is below wmin . Thus minimum
0
wages lead the firm to increase employment from L0 to L0 and wages from w0
to wmin .
Minimum Wages under Oligopsony
wage
MC0’ MC0
LS0’
LS0
Wmin
W0
L0’ L0
Employment
Minimum wages increase rival’s wages and thus push the labor supply curve
0
from LS0 to LS0 . Due to the minimum wages marginal cost of an additional
worker is fixed at wmin as long as LS0´ curve is below wmin . Thus minimum
0
wages lead the firm to increase employment from L0 to L0 and wages from w0
to wmin .
Introduction Card and Krueger (1994) A Model of Monopsonistic Competition