Minimum Wage and Monopsony A-Level Economics AQA OCR Edexcel Eduqas IB

Hi Everyone,
Let tackle why a minimum wage causes S=AC=MC=Min wage for all workers willing and able to work at the minimum wage or lower. And the why the other workers who are not (able and willing) face MC higher than AC as usual.

This is advanced stuff so add any of your questions in the comments!

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SUMMARY NOTE: It is assumed monopsonist employers profit maximise, meaning they hire workers where MC=MRP (marginal revenue product). They are able to do this because there are no alternative employers in the market.
💼 A monopsony will have power to pay workers the minimum they are willing and able to work at. A supply curve of labour shows the minimum that workers are willing and able to work. As a result, this profit maximising level of employees are paid on the supply curve.
💼 Therefore, a minimum wage would be set above the paying wage in order to be effective. Some workers in a monopsony are willing to work at a lower wage than the minimum wage; these workers will now have to be employed at the minimum wage. Consequently, the marginal cost for all workers that are willing to work lower than the minimum wage will be equal to the minimum wage e.g. if a worker was willing to work for £6, but the minimum wage was £12, they would be hired for £12, making the MC 12. This would be the same for each worker hired, as a pay rise does not have to be paid to already hired workers who are working at the minimum wage. Therefore, minimum wage is equal to the marginal cost of labour for workers who are willing to work at or below the minimum wage.
💼 However, some workers will want to be paid higher than the minimum wage. This leads to the same issue as we get in a classic monopsony e.g. if a worker wants 14, the MC is 14 + (2x6 = the pay rise for previous workers) = 28. This creates a discontinuity in the MCL curve - there is a vertical jump from the minimum wage to the rest of the curve, which then continues as it would in a normal monopsony market.
💼 When calculating the average cost for workers willing to work below the minimum wage, we will simply get the value of the minimum wage, as the total cost is constantly increasing by the same as more workers are hired. Therefore, the minimum wage is also equal to the average cost of labour for workers who are willing to work at or below the minimum wage.
💼 For workers who want to work for more than the minimum wage, the average cost of hiring these workers will be back along the labour supply curve - leading to the upward sloping curve.
As S = ACL, the minimum wage will also be equal to the supply curve for workers who are willing to work at or below the minimum wage.

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