Monopsony MRC: Calculate Hiring Cost, Then Read the Wage

Hiring another worker raises the wage paid on existing units in the simple model.

Read Three Hiring-Cost Comparisons

Define Marginal Hiring Cost

Labor supply shows the wage needed to attract a given amount of labor under the model’s conditions. When a uniform wage must rise with employment, the added payroll includes the new worker’s pay and the increase for others. MRC therefore exceeds the wage in this setup. For a smooth interior optimum, choose employment where MRP = MRC and read the wage from supply. With discrete hires or a wage-floor corner, compare the relevant increments and boundaries instead of forcing an equality.

Read the Given Employment and Wage Correctly

In a hypothetical graph, suppose MRP meets MRC at 40 workers, MRC there is $24, and labor supply gives a wage of $18 per hour. The unregulated smooth-interior choice is 40 workers paid $18, not $24. Those values are graph givens, not enough information to infer the shapes of the complete curves.

State the Uniform-Wage Assumption

A monopsonist is a buyer with wage-setting power in a factor market. To attract more labor along an upward-sloping supply curve, it must offer a higher wage. In the simple uniform-wage model, that higher wage applies to existing workers too, making the added cost of the next worker exceed the wage paid to that worker.

Calculate the Discrete Payroll Increase

Suppose four workers can be hired at $15 each and five require $17. Total labor cost rises from 4(15)=$60 to 5(17)=$85. The fifth worker’s MRC is $25, not $17, because the firm pays the new worker $17 plus $2 more to each of four existing workers.

Read Increments from the Payroll Table

Here MRC is the change in total payroll when one worker is added. The dash in the first displayed row does not mean zero: the preceding row’s payroll is not supplied. Use these discrete differences rather than a derivative taken at the row’s worker count.

Choose Employment before Reading the Wage

For the smooth interior case, choose employment where MRP meets MRC and then read the wage from labor supply. For a discrete table, compare the extra revenue and payroll for each additional hire; an exact intersection need not exist. Paying the MRC value would confuse added total cost with the per-worker wage, just as charging monopoly MR would confuse marginal revenue with demand price.

Compare with the Competitive Benchmark

MRP meets MRC at 40 workers, and labor supply gives a wage of $18 there. MRP meets labor supply at 55 workers and $22. The monopsonist hires fewer workers and pays a lower wage than the competitive benchmark in the standard model.

Recognize Sources of Buyer Power

Buyer power can arise from geographic isolation, specialized skills useful to few employers, switching costs, employer concentration, or contractual frictions. One employer need not literally be the only buyer. Monopsony power is a degree, just as monopoly power is.

Recompute Costs When a Wage Floor Applies

A wage increase imposed on the monopsonist can change MRC in a nonstandard way. Up to the quantity workers supply at the legal wage, the firm can hire without raising pay on earlier workers, which helps explain why a moderate minimum wage can raise employment. The ordinary competitive floor result cannot be transferred without checking structure.

Separate Marginal Changes from Fixed Costs

Changes in product demand or worker productivity can shift MRP and change hiring and the wage read from supply. While a firm continues operating with the same constraints, a cost fixed with respect to employment does not shift MRP or MRC or change that conditional hiring optimum. The separate decision to operate can depend on avoidable costs and outside options. An already unrecoverable sunk cost does not become a marginal hiring cost.

Interpret the Gap without Calling It Profit

The vertical gap between MRC and labor supply is not itself economic profit or a tax. Nor is every difference between revenue and wages profit: other inputs and opportunity costs still matter. It reflects the extra wage cost imposed on earlier workers when the firm expands employment along an upward-sloping supply curve. At the chosen employment, the firm pays the supply-curve wage, not the higher MRC value used in the hiring comparison.

Read the Hiring-Cost Definitions

OpenStax’s monopsony lesson derives added labor cost from a uniform wage paid across the workforce. Upward-sloping labor supply and the common-wage assumption explain why payroll can rise by more than the new worker’s wage.

The labor-demand lesson connects hiring to marginal revenue product. For a price-taking employer in the labor market, the wage is the marginal hiring cost; that is a different labor-market assumption from monopsony. These are model comparisons, not measurements of any actual employer’s power or a claim that workers’ wages identify their full social contribution.

Compare a Discrete Hire with a Smooth Model

First, an invented payroll schedule allows six workers at $20 each or seven at $22 each, with one wage paid to everyone. Find the added cost of the seventh hire. Then consider a separate continuous model with labor supply w = 10 + 0.25L and MRP = 40 − 0.5L. L measures continuous labor units per period, from 0 to 80, with dollars per labor unit used consistently. Assume an operating, unregulated, uniform-wage employer and fixed schedules. Find employment, the wage and the otherwise competitive intersection.

Try Three Marginal-Hiring-Cost Questions

Connect Payroll to Wage Floors and Other Marginal Values

Check how a minimum wage changes a monopsonist’s hiring-cost schedule, review marginal changes and their units, and continue through the CLEP Microeconomics learning hub.