In a competitive labor market, imposing a minimum wage (above the market equilibrium) should reduce the level of employment. Will this also be true if the labor market is a monopsony.

Imposing a minimum wage will _____ (Not Affect, Increase Or Decrease) employment because a firm with a monopsony otherwise will _____(Hire More, Hire Fewer) workers to pay _____(lower, higher) wages.

The best answers are (increase), (hire more), (higher).

This response may seem counter-intuitive: increasing a firm's labor costs via a minimum wage would seem to decrease the amount of labor hired.

The crux of this argument lies in the labor supply curve. As a firm in a competitive labor market increases wages, more labor is drawn into the market, and the firm will hire these higher wage workers if their marginal product of labor (marginal revenue from increased labor output) exceeds the marginal cost of the labor. As long as marginal revenue exceeds marginal cost, the firm will add labor.

The competitive firm faces an upward sloping labor supply curve (higher wages draw in more workers), and thus a steeper upward sloping marginal labor cost curve (to increase labor output, the firm must pay a higher wage to induce more workers to join). Where this curve meets the downward sloping marginal product of output, the equilibrium wage and labor quantity is set for the firm.

This equilibrium is depicted in the graph using the points QC and WC. The competitive firm hires labor quantity QC at wage WC such that the marginal cost of labor curve intersects the marginal product of labor curve. This is the profit-maximizing wage in a competitive labor market.

In a monopsony with a minimum wage "floor", the single employer buying labor from the workforce now faces a labor supply curve that is horizontally fixed at the minimum wage until all of the workers willing to work at that wage have been hired. Because the minimum wage is fixed at a wage higher than the competitive equilibrium, this wage "floor" draws in a larger quantity of workers at a constant wage until that labor pool is exhausted. Wages are higher, and thus the supply of labor is greater.

This is indicated in the graphic by the purple horizontal dotted line running from the minimum wage MW to the point where it intersects the red labor supply curve at labor quantity QM. At this point, the labor supply curve resumes its upward slope. Increasing output beyond the supply of labor available at the minimum wage requires paying a higher wage, and thus the marginal cost of labor "jumps" from a flat rate to a higher, upward sloping curve that follows the upper portion of the competitive market curve.

But will the firm hire the additional labor willing to work at the minimum wage? The answer depends on the marginal cost of the labor. With a minimum wage, the firm can add labor at a constant marginal cost up until QM. The monopsonist firm will keep adding labor at a constant cost until its new marginal cost of labor curve intersects its marginal product of labor curve (green line).

This is depicted in the graphic via the dotted purple line running horizontally at the minimum wage level WM up to the quantity QF. At this point, marginal revenue equals marginal cost (of labor) and the firm will stop hiring. In this case, there is still some unused labor available in the market (QM - QF) at the minimum wage. If the firm could increase its marginal revenue of labor, it could hire some more of these workers.

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