What Makes a Labor Market Monopsonistic

Picture a mine in a remote town where it is the only employer for miles. Workers who want a job have one option, so the mine does not take the going wage as given the way a competitive firm does. It faces the whole upward sloping supply curve of labor: to hire more workers, it has to raise the wage for everyone already on payroll, not just the new hire. That makes the marginal cost of labor rise faster than the wage itself, and a profit maximizing monopsonist hires fewer workers at a lower wage than a competitive market would produce.

Compare this to a monopoly seller. A monopoly firm is the only seller of a good, facing the whole downward sloping demand curve, and it raises price above marginal cost by restricting output. A monopsonist is the mirror image on the buying side of a factor market: it is the only buyer of labor, facing the whole upward sloping supply curve, and it depresses the wage below the value of what an extra worker produces by restricting hiring. Both exploit being the single point of contact in the market, one on the sell side, one on the buy side.

Monopsony power depends on how many alternative buyers workers actually have, not on how big the firm is. A giant company in a city with hundreds of competing employers has almost no monopsony power, because workers can simply apply elsewhere. But if workers in that remote town can commute to a nearby city, the mine suddenly competes with outside employers, the effective labor supply curve it faces flattens, and its power shrinks toward the competitive outcome.