Why MRC Lies Above the Labor Supply Curve

A single competitive firm hiring labor takes the wage as given. It can hire another worker at the same market wage, so its marginal resource cost of labor equals that wage, and its hiring decision never moves the market price. A monopsonist is different: it is the only buyer of a particular type of labor, so it faces the entire upward-sloping labor supply curve itself. To pull one more worker off the sidelines, it must offer a higher wage, and because it cannot pay different wages to identical workers, that higher wage goes to everyone already on payroll too.

This is the same logic as a monopolist's marginal revenue lying below the demand curve, just flipped. A monopolist earns less extra revenue than the price because selling one more unit forces the price down on all units. A monopsonist pays more extra cost than the wage because hiring one more worker forces the wage up on all workers. So marginal resource cost equals the new wage paid to the added worker, plus the raise multiplied across every existing worker, and that sum always exceeds the wage alone. As hiring rises, the gap between the supply curve and MRC widens, because the raise applies to a growing workforce.

This setup feeds directly into how a monopsonist picks its hiring level: it hires where MRC meets marginal revenue product, then pays only the wage the supply curve says is needed at that quantity, leaving a gap that depresses both employment and wages below the competitive outcome.