AQA A-level Economics: Monopsony and trade unions in labour markets (7136) – Revision Notes

Condensed recall for the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-sections 3.1.6.4 and 3.1.6.5 on the AQA website (4.1.6.4 and 4.1.6.5 in the combined PDF): imperfectly competitive labour markets, and the influence of trade unions on wages and employment. For full explanations use the study guide, then test yourself with the practice questions. Also see the AQA A-level Economics hub, the printable checklist and the free 10-minute diagnostics. All figures below are invented.

Definitions to recall

Term	Definition
Monopsony	A labour market with a single buyer of labour; in use, a dominant employer with wage-setting power
Monopsony power	The ability of an employer to set a wage below the competitive level
Trade union	A body of workers that negotiates jointly with employers on pay and conditions
Collective bargaining	Negotiation between a union and an employer (or employers) on behalf of members
Imperfect information	Workers or employers lack full knowledge of wages, vacancies or productivity
Average cost of labour (AC)	The wage per worker; the labour supply curve
Marginal cost of labour (MCL)	The addition to the total wage bill from employing one more worker
Marginal revenue product (MRP)	The extra revenue from employing one more worker; the labour demand curve
Bilateral monopoly	A single seller (a union) facing a single buyer (an employer)
Insiders and outsiders	Insiders keep their jobs at the union wage; outsiders are unemployed or priced out

Three imperfections in one line each

• Monopsony power: one dominant buyer sets the wage instead of taking it.
• Trade unions: many sellers act as one, pushing the wage above the competitive level.
• Imperfect information: workers do not know better offers elsewhere; employers do not know a candidate’s productivity. Search is costly, so wages differ for similar work.

Monopsony: key rules

1. Employer hires where MCL = MRP.
2. It pays the wage on the supply curve at that employment level.
3. MCL lies above supply because one wage is paid to all workers, so extra hiring pushes up everyone’s pay.
4. Result: wage and employment both below the competitive levels.

Method in steps (diagram)

1. Label axes: wage (vertical), number of workers (horizontal).
2. Draw upward-sloping supply (AC of labour) and a steeper MCL above it.
3. Draw downward-sloping MRP (demand).
4. Mark competitive equilibrium where supply meets MRP: wage Wc, employment Lc.
5. Mark where MCL meets MRP: employment Lm, lower than Lc.
6. Go vertically from Lm to supply and across: the monopsony wage Wm, below Wc.
7. Show the gap between MRP and Wm at Lm.

Worked reminder: a small invented town

Labour supply in Town B: wage = 4 + 0.5L, with L in hundreds of workers and the wage in pounds per hour. MRP = 16 − 0.5L.

Step	Working	Result
Competitive	4 + 0.5L = 16 − 0.5L, so L = 12	Wage 4 + 6 = 10; employment 1,200
Total labour cost	(4 + 0.5L) × L = 4L + 0.5L²	Marginal cost = 4 + L
Monopsony	4 + L = 16 − 0.5L, so 1.5L = 12, L = 8	Employment 800
Wage from supply	4 + 0.5 × 8	Wage 8
MRP at 8	16 − 0.5 × 8	12
Gap	12 − 8	4 pounds per hour

Monopsony wage is (10 − 8)/10 = 20% below the competitive wage. Employment is (12 − 8)/12 = 33.3% lower. Wage bill: 8 × 8 = 64, against 10 × 12 = 120 (units are hundreds of workers times pounds).

Evaluation points for monopsony

• A more elastic labour supply narrows the gaps.
• Workers who can move easily or find out about other jobs reduce monopsony power.
• Few labour markets have a single employer; dominant employers and employers acting alike are more common.
• Low wages can raise staff turnover and recruitment costs, a long-run limit on wage cutting.

Union power: what to recall

Factor	Stronger union when…
Membership density	most workers are members
Demand for labour	demand is wage-inelastic
Share of labour cost	labour is a small part of total cost
Product demand	demand for the product is inelastic
Substitutes	few ways to replace the workers
Skills	workers are skilled and scarce
Economy	unemployment is low and demand is strong
Profitability	the firm is profitable and can afford a rise
Law and attitudes	the law allows industrial action and public opinion is supportive

Three things that keep a union’s gains in check: employers can replace workers with capital, import or relocate; high wages can cut employment; and a strike costs members income.

Union in a perfectly competitive market

Wage rises above equilibrium; employment falls along the demand curve; surplus labour appears.

Using Town B’s competitive market (wage 10, 1,200 workers), a union wins a wage of 12:

Step	Working	Result
Demand at 12	16 − 0.5L = 12, so L = 8	800 employed
Supply at 12	4 + 0.5L = 12, so L = 16	1,600 willing
Surplus	16 − 8	800 unemployed
Wage bill	12 × 8 = 96 against 10 × 12 = 120	Falls by 24
Elasticity	%ΔW = +20%; %ΔL = −33.3%	−33.3 ÷ 20 = −1.67

Because the wage elasticity of demand for labour is greater than 1 in size, the total pay of members falls. If it were inelastic, the pay bill would rise. Either way, jobs are lost and outsiders suffer.

Union in a monopsony

The union wage replaces the rising supply wage up to the point where workers are willing to work at that wage, so MCL is flat at the union wage over that range. Employment is the smaller of what the firm demands and what workers supply at that wage.

Town B, where the monopsony wage is 8 and employment is 800:

Union wage	Supply (hundreds)	Demand (hundreds)	Employment	Wage bill
9	10	14	10	90
10	12	12	12	120
11	14	10	10	110
12	16	8	8	96
13	18	6	6	78

• Wage 9 to 10: both wages and employment rise.
• Wage 10 (the competitive wage): employment is maximised at 1,200.
• Wage 11: employment of 1,000 is still above the monopsony level of 800.
• Wage 12: employment returns to the monopsony level, 800.
• Above 12: employment falls below what monopsony alone would give.

Key statement: a union in a monopsony can raise both wages and employment, but only for wage rises up to a limit. The result depends on where the wage is set.

Must-know distinctions

Idea A	Idea B
Union in a competitive market: raises wage, cuts employment	Union in monopsony: can raise wage and employment
Supply curve (AC): the wage the employer must pay	MCL: the extra cost of an extra worker
Employment decided at MCL = MRP	Wage read from supply, not from MCL
Insiders: members in work	Outsiders: unemployed or priced out

Quick self-test

1. Why does MCL lie above the supply curve for a monopsonist?
2. Where does a monopsonist choose employment, and how is the wage found?
3. In Town B, what are the monopsony wage and employment?
4. Name two factors that make a union stronger.
5. A union in a competitive market raises the wage 10%; employment falls 6%. What does this say about the wage elasticity of demand and the total wage bill?
6. In Town B, a union sets the wage at 11. What happens to employment compared with monopsony?
7. State the effect of a union in a monopsony if the wage is set far above the competitive level.
8. How does imperfect information contribute to labour market imperfection?
9. What is a bilateral monopoly?
10. Give one reason why an employer’s monopsony power might be limited.

Answers

1. One wage is paid to all workers, so hiring one more means raising the pay of existing staff as well as paying the new worker.
2. At the employment level where MCL = MRP; the wage is then read off the supply curve at that level.
3. Wage 8 pounds per hour, employment 800 workers.
4. Any two of: high membership density, inelastic demand for labour, inelastic product demand, labour a small share of costs, few substitutes, scarce skills, low unemployment, profitable firm.
5. Elasticity is −6 ÷ 10 = −0.6, which is inelastic, so the total wage bill rises. As a check, 1.10 × 0.94 = 1.034, a 3.4% rise.
6. Employment is 1,000, which is above the monopsony level of 800.
7. Employment falls below the monopsony level, so the union costs jobs.
8. Workers cannot compare wages or vacancies, so they stay in lower-paid jobs; employers can pay less than the value of workers’ output without losing them all.
9. A single seller of labour (a union) facing a single buyer (an employer).
10. Easy movement of workers to other employers or areas makes labour supply more elastic.

Where marks are usually lost

• Drawing MCL below or on the supply curve.
• Taking the monopsony wage from the MRP or MCL curve.
• Describing the union effect in a competitive market without noting the surplus of labour at the union wage.
• Saying unions always cause unemployment, or always raise employment, with no mention of the market type.
• Forgetting to calculate or compare wage elasticity when asked about the wage bill.
• Listing union power factors without explaining the chain of reasoning behind each one.
• Concluding with a repeat of the points rather than a judgement that depends on stated conditions.
• Ignoring outsiders when judging who benefits.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA: the A-level sub-sections 3.1.6.4 and 3.1.6.5 on the AQA website (4.1.6.4 and 4.1.6.5 in the combined PDF).