The market supply curve for labor is upsloping because

MicroEconomics 5

10: Wage Determination IN THIS CHAPTER YOU WILL LEARN:

1 Why the firm's marginal revenue product curve is its labor demand curve.

2 The factors that increase or decrease labor demand.

3 The determinants of elasticity of labor demand.

4 How wage rates are determined in competitive and monopsonistic labor markets.

5 How unions increase wage rates.

6 The major causes of wage differentials.

We now turn from the pricing and production of goods and services to the pricing and employment of resources. Although firms come in various sizes and operate under highly different market conditions, each has a demand for productive resources. They obtain those resources from households—the direct or indirect owners of land, labor, capital, and entrepreneurial resources. So, referring to the circular flow diagram (Figure 2.2, page 43), we shift our attention from the bottom loop (where businesses supply products that households demand) to the top loop (where businesses demand resources that households supply).

A Focus on Labor The basic principles we develop in this chapter apply to land, labor, and capital resources, but we will emphasize the pricing and employment of labor. About 70 percent of all income in the United States flows to households in the form of wages and salaries. More than 146 million of us go to work each day in the United States. We have an amazing variety of jobs with thousands of different employers and receive large differences in

pay. What determines our hourly wage or annual salary? Why is the salary of, say, a topflight major-league baseball player $15 million or more a year, whereas the pay for a first-rate schoolteacher is $50,000? Why are starting salaries for college graduates who major in engineering and accounting so much higher than those for graduates majoring in journalism and sociology?

Demand and supply analysis helps us answer these questions. We begin by examining labor demand and labor supply in a purely competitive labor market. In such a market,

purely competitive labor market

A labor market in which a large number of similarly qualified workers independently offer their labor services to a large number of employers, none of whom can set the wage rate.

• Numerous employers compete with one another in hiring a specific type of labor.

• Each of many workers with identical skills supplies that type of labor.

• Individual employers and individual workers are “wage takers” because neither can control the market wage rate.

Labor Demand

WORKED PROBLEMS

W 10.1

Labor demand

Labor demand is the starting point for any discussion of wages and salaries. Other things equal, the demand for labor is an inverse relationship between the price of labor (hourly wage) and the quantity of labor demanded. As with all resources, labor demand is a derived demand: It results from the

products that labor helps produce. Labor resources usually do not directly satisfy customer wants but do so indirectly through their use in producing goods and services. Almost nobody wants to consume directly the labor services of a software engineer, but millions of people do want to use the software that the engineer helps create.

derived demand

The demand for a resource that results from the demand for the products it helps produce.

Marginal Revenue Product Because resource demand is derived from product demand, the strength of the demand will depend on the productivity of the labor—its ability to produce goods and services—and the price of the good or service it helps produce. A resource that is highly productive in turning out a highly valued commodity will be in great demand. In contrast, a relatively unproductive resource that is capable of producing only a minimally valued commodity will be in little demand. And no demand whatsoever will exist for a resource that is phenomenally efficient in producing something that no one wants to buy.

Consider the table in Figure 10.1, which shows the roles of marginal productivity and product price in determining labor demand. FIGURE 10.1: The purely competitive seller's demand for labor.

The MRP-of-labor curve is the labor demand curve; each of its points relates a particular wage rate (= MRP when profit is maximized) with a corresponding quantity of labor demanded. The downward slope of the D = MRP curve results from the law of diminishing marginal returns.

Productivity Columns 1 and 2 give the number of units of labor employed and the resulting total product (output). Column 3 provides the marginal product (MP), or additional output, resulting from using each additional unit of

labor. Columns 1 through 3 remind us that the law of diminishing returns applies here, causing the marginal product of labor to fall beyond some point. For simplicity, we assume that these diminishing marginal returns—these declines in marginal product—begin with the second worker hired.

Product Price The derived demand for labor depends also on the market value (product price) of the good or service. Column 4 in the table in Figure 10.1 adds this price information to the mix. Because we are assuming a competitive product market, product price equals marginal revenue. The firm is a price taker and will sell units of output only at this market price. And this price will also be the firm's marginal revenue. In this case, both price and marginal revenue are a constant $2.

Multiplying column 2 by column 4 provides the total-revenue data of column 5. These are the amounts of revenue the firm realizes from the various levels of employment. From these total-revenue data we can compute the marginal revenue product (MRP) of labor—the change in total revenue resulting from the use of each additional unit of labor. In equation form,

marginal revenue product (MRP)

The change in a firm's total revenue when it employs 1 more unit of labor.

The MRPs are listed in column 6 in the table.

Rule for Employing Labor: MRP = MRC The MRP schedule, shown as columns 1 and 6, is the firm's demand

schedule for labor. To understand why, you must first know the rule that guides a profit-seeking firm in hiring any resource: To maximize profit, a firm should hire additional units of labor as long as each successive unit adds more to the firm's total revenue than to the firm's total cost.

Economists use special terms to designate what each additional unit of labor (or any other variable resource) adds to total revenue and what it adds to total cost. We have seen that MRP measures how much each successive unit of labor adds to total revenue. The amount that each additional unit of labor adds to the firm's total cost is called its marginal resource cost (MRC). In equation form,

marginal resource cost (MRC)

The change in a firm's total cost when it employs 1 more unit of labor.

So we can restate our rule for hiring resources as follows: It will be profitable for a firm to hire additional units of labor up to the point at which labor's MRP is equal to its MRC. If the number of workers a firm is currently hiring is such that the MRP of the last worker exceeds his or her MRC, the firm can profit by hiring more workers. But if the number being hired is such that the MRC of the last worker exceeds his or her MRP, the firm is hiring workers who are not “paying their way” and it can increase its profit by discharging some workers. You may have recognized that this MRP = MRC rule is similar to the MR = MC profit-maximizing rule employed throughout our discussion of price and output determination. The rationale of the two rules is the same, but the point of reference is now inputs of a resource, not outputs of a product.

MRP = MRC rule

The principle that to maximize profit a firm should expand employment until the marginal revenue product (MRP) of labor equals the marginal

resource cost (MRC) of labor.

MRP as Labor Demand Schedule In a competitive labor market, market supply and market demand establish the wage rate. Because each firm hires such a small fraction of the market supply of labor, an individual firm cannot influence the market wage rate; it is a wage taker, not a wage maker. This means that for each additional unit of labor hired, total labor cost increases by exactly the amount of the constant market wage rate. The MRC of labor exactly equals the market wage rate. Thus, resource “price” (the market wage rate) and resource “cost” (marginal resource cost) are equal for a firm that hires labor in a competitive labor market. Then the MRP = MRC rule tells us that a competitive firm will hire units of labor up to the point at which the market wage rate (its MRC) is equal to its MRP.

In terms of the data in columns 1 and 6 of Figure 10.1 's table, if the market wage rate is, say, $13.95, the firm will hire only one worker. This is the outcome because the first worker adds $14 to total revenue and slightly less—$13.95—to total cost. In other words, because MRP exceeds MRC for the first worker, it is profitable to hire that worker. For each successive worker, however, MRC (= $13.95) exceeds MRP (= $12 or less), indicating that it will not be profitable to hire any of those workers. If the wage rate is $11.95, by the same reasoning we discover that it will pay the firm to hire both the first and second workers. Similarly, if the wage rate is $9.95, three will be hired; if it is $7.95, four; if it is $5.95, five; and so forth. The MRP schedule therefore constitutes the firm's demand for labor because each point on this schedule (or curve) indicates the quantity of labor units the firm would hire at each possible wage rate. In the graph in Figure 10.1, we show the D = MRP curve based on the data in the table. The competitive firm's labor demand curve identifies an inverse relationship between the wage rate and the quantity of labor demanded, other things equal. The curve slopes downward because of

diminishing marginal returns.1

Market Demand for Labor We have now explained the individual firm's demand curve for labor. Recall that the total, or market, demand curve for a product is found by summing horizontally the demand curves of all individual buyers in the market. The market demand curve for a particular resource is derived in essentially the same way. Economists sum horizontally the individual labor demand curves of all firms hiring a particular kind of labor to obtain the market demand for that labor.

Changes in Labor Demand What will alter the demand for labor (shift the labor demand curve)? The fact that labor demand is derived from product demand and depends on resource productivity suggests two “resource demand shifters.” Also, our analysis of how changes in the prices of other products can shift a product's demand curve (Chapter 3) suggests another factor: changes in the prices of other resources.

Changes in Product Demand Other things equal, an increase in the demand for a product will increase the demand for a resource used in its production, whereas a decrease in product demand will decrease the demand for that resource.

Let's see how this works. The first thing to recall is that a change in the demand for a product will normally change its price. In the table in Figure 10.1, let's assume that an increase in product demand boosts product price from $2 to $3. You should calculate the new labor demand schedule (columns 1 and 6) that would result, and plot it in the graph to verify that the new labor demand curve lies to the right of the old demand curve. Similarly, a decline in the product demand (and price) will shift the labor

demand curve to the left. The fact that labor demand changes along with product demand demonstrates that labor demand is derived from product demand.

Example: With no offsetting change in supply, a decrease in the demand for new houses will drive down house prices. Those lower prices will decrease the MRP of construction workers, and therefore the demand for construction workers will fall. The labor demand curve will shift to the left.

Changes in Productivity Other things equal, an increase in the productivity of a resource will increase the demand for the resource and a decrease in productivity will reduce the demand for the resource. If we doubled the MP data of column 3 in the table in Figure 10.1, the MRP data of column 6 also would double, indicating a rightward shift of the labor demand curve in the graph.

The productivity of any resource may be altered over the long run in several ways:

• Quantities of other resources The marginal productivity of any resource will vary with the quantities of the other resources used with it. The greater the amount of capital and land resources used with labor, the greater will be labor's marginal productivity and, thus, labor demand.

• Technological advance Technological improvements that increase the quality of other resources, such as capital, have the same effect. The better the quality of capital, the greater the productivity of labor used with it. Dockworkers employed with a specific amount of capital in the form of unloading cranes are more productive than dockworkers with the same amount of capital embodied in older conveyor-belt systems.

• Quality of labor Improvements in the quality of labor will increase its marginal productivity and therefore its demand. In effect, there will be a new demand curve for a different, more skilled, kind of

labor.

Changes in the Prices of Other Resources Changes in the prices of other resources may change the demand for labor.

Substitute Resources Suppose that labor and capital are substitutable in a certain production process. A firm can produce some specific amount of output using a relatively small amount of labor and a relatively large amount of capital, or vice versa. What happens if the price of machinery (capital) falls? The effect on the demand for labor will be the net result of two opposed effects: the substitution effect and the output effect.

• Substitution effect The decline in the price of machinery prompts the firm to substitute machinery for labor. This allows the firm to produce its output at lower cost. So at the fixed wage rate, smaller quantities of labor are now employed. This substitution effect decreases the demand for labor. More generally, the substitution effect indicates that a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased.

substitution effect

The replacement of labor by capital when the price of capital falls.

• Output effect Because the price of machinery has declined, the costs of producing various outputs also must decline. With lower costs, the firm can profitably produce and sell a greater output. The greater output increases the demand for all resources, including labor. So this output effect increases the demand for labor. More generally, the output effect means that the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises.

output effect

An increase in the use of labor that occurs when a decline in the price of capital reduces a firm's production costs and therefore enables it to sell more output.

• Net effect The substitution and output effects are both present when the price of an input changes, but they work in opposite directions. For a decline in the price of capital, the substitution effect decreases the demand for labor and the output effect increases it. The net change in labor demand depends on the relative sizes of the two effects: If the substitution effect outweighs the output effect, a decrease in the price of capital decreases the demand for labor. If the output effect exceeds the substitution effect, a decrease in the price of capital increases the demand for labor.

Complementary Resources Resources may be complements rather than substitutes in the production process; an increase in the quantity of one of them also requires an increase in the amount of the other used, and vice versa. Suppose a small design firm does computer-assisted design (CAD) with relatively expensive personal computers as its basic piece of capital equipment. Each computer requires exactly one design engineer to operate it; the machine is not automated—it will not run itself—and a second engineer would have nothing to do.

Now assume that these computers substantially decline in price. There can be no substitution effect because labor and capital must be used in fixed proportions: one person for one machine. Capital cannot be substituted for labor. But there is an output effect. Other things equal, the reduction in the price of capital goods means lower production costs. It will therefore be profitable to produce a larger output. In doing so, the firm will use both more capital and more labor. When labor and capital are complementary, a decline in the price of capital increases the demand

for labor through the output effect.

We have cast our analysis of substitute resources and complementary resources mainly in terms of a decline in the price of capital. Obviously, an increase in the price of capital causes the opposite effects on labor demand. Photo Op: Substitute Resources versus Complementary Resources

© Photodisc/Getty Images

© Royalty-Free/CORBIS

Automatic teller machines (ATMs) and human tellers are substitute resources, whereas construction equipment and their operators are complementary resources.

APPLYING THE ANALYSIS: Occupational Employment Trends Changes in labor demand are of considerable significance because they affect employment in specific occupations. Other things equal, increases in labor demand for certain occupational groups result in increases in their employment; decreases in labor demand result in decreases in their employment. For illustration, let's look at occupations that are growing and declining in demand.

Table 10.1 lists the 10 fastest-growing and 10 most rapidly declining U.S. occupations (in percentage terms) for 2006 to 2016, as projected by the Bureau of Labor Statistics. Notice that service occupations

dominate the fastest-growing list. In general, the demand for service workers is rapidly outpacing the demand for manufacturing, construction, and mining workers in the United States. TABLE 10.1: The 10 Fastest-Growing and Most Rapidly Declining U.S. Occupations, in Percentage Terms, 2006–2016

Of the 10 fastest-growing occupations in percentage terms, three— personal and home care aides (people who provide home care for the elderly and those with disabilities), home health care aides (people who provide short-term medical care after discharge from hospitals), and medical assistants—are related to health care. The rising demands for these types of labor are derived from the growing demand for health services, caused by several factors. The aging of the U.S. population has brought with it more medical problems, rising incomes have led to greater expenditures on health care, and the growing presence of private and public insurance has allowed people to buy more health care than most could afford individually.

Two of the fastest-growing occupations are directly related to computers. The increase in the demand for network systems and data communication analysts and for computer software engineers arises from the rapid rise in the demand for computers, computer services, and the Internet. It also results from the rising marginal revenue productivity of these particular workers, given the vastly improved quality of the computer and communications equipment they work with. Moreover, price declines on such equipment have had stronger output effects than substitution effects, increasing the demand for these kinds of labor.

Table 10.1 also lists the 10 U.S. occupations with the greatest projected job loss (in percentage terms) between 2006 and 2016. These occupations are more diverse than the fastest-growing occupations. Four of the ten are related to textiles, apparel, and shoes. The U.S. demand for these goods is increasingly being fulfilled through imports, some of which is related to outsourcing those jobs to workers abroad. Declines in other occupations in the list (for example, file clerks, model and pattern makers, and telephone operators) have resulted from technological advances that have enabled firms to replace workers with automated or computerized equipment. The advent of digital photography explains the projected decline in the employment of people operating photographic processing equipment.

Question:

Name some occupation (other than those listed) that you think will grow in demand over the next decade. Name an occupation that you think will decline in demand. In each case, explain your reasoning.

Elasticity of Labor Demand The employment changes we have just discussed have resulted from shifts in the locations of labor demand curves. Such changes in demand must be distinguished from changes in the quantity of labor demanded caused by a change in the wage rate. Such a change is caused not by a shift of the demand curve but, rather, by a movement from one point to another on a fixed labor demand curve. Example: In Figure 10.1 we note that an increase in the wage rate from $5 to $7 will reduce the quantity of labor demanded from 5 units to 4 units. This is a change in the quantity of labor demanded as distinct from a change in labor demand.

The sensitivity of labor quantity to changes in wage rates is measured by the elasticity of labor demand (or wage elasticity of demand). In coefficient form,

elasticity of labor demand

A measure of the responsiveness of labor quantity to a change in the wage rate.

ORIGIN OF THE IDEA

O 10.1

Elasticity of resource demand

When Ew is greater than 1, labor demand is elastic; when Ew is less than 1,

labor demand is inelastic; and when Ew equals 1, labor demand is unit-

elastic. Several factors interact to determine the wage elasticity of demand.

Ease of Resource Substitutability The greater the substitutability of other resources for labor, the more elastic is the demand for labor. Example: Because automated voice-mail systems are highly substitutable for telephone receptionists, the demand for receptionists is quite elastic. In contrast, there are few good substitutes for physicians, so demand for them is less elastic or even inelastic.

Time can play a role in the input substitution process. For example, a firm's truck drivers may obtain a substantial wage increase with little or no immediate decline in employment. But over time, as the firm's trucks wear out and are replaced, that wage increase may motivate the company to purchase larger trucks and in that way deliver the same total output with fewer drivers.

Elasticity of Product Demand The greater the elasticity of product demand, the greater is the elasticity of labor demand. The derived nature of resource demand leads us to expect this relationship. A small rise in the price of a product (caused by a wage increase) will sharply reduce output if product demand is elastic. So a relatively large decline in the amount of labor demanded will result. This means that the demand for labor is elastic.

Ratio of Labor Cost to Total Cost The larger the proportion of total production costs accounted for by labor, the greater is the elasticity of demand for labor. In the extreme, if labor

cost is the only production cost, then a 20 percent increase in wage rates will increase marginal cost and average total cost by 20 percent. If product demand is elastic, this substantial increase in costs will cause a relatively large decline in sales and a sharp decline in the amount of labor demanded. So labor demand is highly elastic. But if labor cost is only 50 percent of production cost, then a 20 percent increase in wage rates will increase costs by only 10 percent. With the same elasticity of product demand, this will cause a relatively small decline in sales and therefore in the amount of labor demanded. In this case the demand for labor is much less elastic.

Market Supply of Labor Let's now turn to the supply side of a purely competitive labor market. The supply curve for each type of labor slopes upward, indicating that employers as a group must pay higher wage rates to obtain more workers. Employers must do this to bid workers away from other industries, occupations, and localities. Within limits, workers have alternative job opportunities. For example, they may work in other industries in the same locality, or they may work in their present occupations in different cities or states, or they may work in other occupations.

Firms that want to hire these workers must pay higher wage rates to attract them away from the alternative job opportunities available to them. They also must pay higher wages to induce people who are not currently in the labor force—who are perhaps doing household activities or enjoying leisure —to seek employment. In short, assuming that wages are constant in other labor markets, higher wages in a particular labor market entice more workers to offer their labor services in that market. This fact results in a direct relationship between the wage rate and the quantity of labor supplied, as represented by the upward-sloping market supply-of-labor curve S in Figure 10.2a. FIGURE 10.2: A purely competitive labor market.

In a purely competitive labor market (a) the equilibrium wage rate Wc

and the number of workers Qc are determined by labor supply S and

labor demand D. Because this market wage rate is given to the individual firm (b) hiring in this market, its labor supply curve s = MRC is perfectly elastic. Its labor demand curve, d, is its MRP curve (here labeled mrp). The firm maximizes its profit by hiring workers up to the point where MRP = MRC.

Wage and Employment Determination What determines the market wage rate and how do firms respond to it? Suppose 200 firms demand a particular type of labor, say, carpenters. These firms need not be in the same industry; industries are defined according to the products they produce and not the resources they employ. Thus, firms producing wood-framed furniture, wood windows and doors, houses and apartment buildings, and wood cabinets will demand carpenters. To find the total, or market, labor demand curve for a particular labor service, we sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms, as indicated in Figure 10.2. The horizontal summing of the 200 labor demand curves like d in Figure 10.2b yields the

market labor demand curve D in Figure 10.2a.

The intersection of the market labor demand curve D and the market labor supply curve S in Figure 10.2 a determines the equilibrium wage rate and the level of employment in this purely competitive labor market. Observe that the equilibrium wage rate is Wc ($10) and the number of workers hired

is Qc (1000).

To the individual firm (Figure 10.2b) the market wage rate Wc is given at

$10. Each of the many firms employs such a small fraction of the total available supply of this type of labor that no single firm can influence the wage rate. As shown by the horizontal line s in Figure 10.2b, the supply of labor faced by an individual firm is perfectly elastic. It can hire as many or as few workers as it wants to at the market wage rate. This fact is clarified in Table 10.2, where we see that the marginal cost of labor MRC is constant at $10 and is equal to the wage rate. Each additional unit of labor employed adds precisely its own wage rate (here, $10) to the firm's total resource cost.

TABLE 10.2: The Supply of Labor: Pure Competition in the Hire of Labor

INTERACTIVE GRAPHS

G 10.1

Competitive labor market

Each individual firm will apply the MRP = MRC rule to determine its profitmaximizing level of employment. So the competitive firm maximizes its profit by hiring units of labor to the point at which its wage rate (= MRC) equals MRP. In Figure 10.2b the employer will hire qc (5) units of

labor, paying each worker the market wage rate Wc ($10). The other 199

firms (not shown) in this labor market will also each employ 5 workers and pay $10 per hour. The workers will receive pay based on their contribution to the firm's output and thus revenues.

Monopsony In the purely competitive labor market, each firm can hire as little or as much labor as it needs at the market wage rate, as reflected in its horizontal labor supply curve. The situation is strikingly different in monopsony, a market in which a single employer of labor has substantial buying (hiring) power. Labor market monopsony has the following characteristics:

• There is only a single buyer of a particular type of labor.

• This type of labor is relatively immobile, either geographically or because workers would have to acquire new skills.

• The firm is a “wage maker,” because the wage rate it must pay varies directly with the number of workers it employs.

monopsony

A market structure in which only a single buyer of a good, service, or

resource is present.

ORIGIN OF THE IDEA

O 10.2

Monopsony

As is true of monopoly power, there are various degrees of monopsony power. In pure monopsony such power is at its maximum because only a single employer hires labor in the labor market. The best real-world examples are probably the labor markets in towns that depend almost entirely on one major firm. For example, a silvermining company may be almost the only source of employment in a remote Idaho town. A Wisconsin paper mill, a Colorado ski resort, or an Iowa food processor may provide most of the employment in its locale. In other cases, three or four firms may each hire a large portion of the supply of labor in a certain market and therefore have some monopsony power. Moreover, if they illegally act in concert in hiring labor, they greatly enhance their monopsony power.

Upward-Sloping Labor Supply to Firm When a firm hires most of the available supply of a certain type of labor, its decision to employ more or fewer workers affects the wage rate it pays to those workers. Specifically, if a firm is large in relation to the size of the labor market, it will have to pay a higher wage rate to obtain more labor. Suppose that only one employer hires a particular type of labor in a certain geographic area. In this pure monopsony situation, the labor supply curve for the firm and the total labor supply curve for the labor market are identical. The monopsonist's supply curve—represented by curve S in Figure 10.3—is upsloping because the firm must pay higher wage rates if it wants to attract and hire additional workers. This same curve is also the monopsonist's average-cost-of-labor curve. Each point on curve S indicates the wage rate (cost) per worker that must be paid to attract the corresponding number of workers.

FIGURE 10.3: Monopsony.

In a monopsonistic labor market the employer's marginal resource (labor) cost curve (MRC) lies above the labor supply curve S. Equating MRC with MRP at point b, the monopsonist hires Qm workers

(compared with Qc under competition). As indicated by point c on S, it

pays only wage rate Wm (compared with the competitive wage Wc).

MRC Higher Than the Wage Rate When a monopsonist pays a higher wage to attract an additional worker, it must pay that higher wage not only to the additional worker, but to all the workers it is currently employing at a lower wage. If not, labor morale will deteriorate, and the employer will be plagued with labor unrest because of wage-rate differences existing for the same job. Paying a uniform wage to all workers means that the cost of an extra worker—the marginal resource (labor) cost (MRC)—is the sum of that worker's wage

rate and the amount necessary to bring the wage rate of all current workers up to the new wage level.

WORKED PROBLEMS

W 10.2

Labor markets: competition and monopsony

Table 10.3 illustrates this point. One worker can be hired at a wage rate of $6. But hiring a second worker forces the firm to pay a higher wage rate of $7. The marginal resource cost of the second worker is $8—the $7 paid to the second worker plus a $1 raise for the first worker. From another viewpoint, total labor cost is now $14 (= 2 × $7), up from $6. So the MRC of the second worker is $8 (= $14 − $6), not just the $7 wage rate paid to that worker. Similarly, the marginal labor cost of the third worker is $10—the $8 that must be paid to attract this worker from alternative employment plus $1 raises, from $7 to $8, for the first two workers.

TABLE 10.3: The Supply of Labor: Monopsony in the Hiring of Labor

Here is the key point: Because the monopsonist is the only employer in the labor market, its marginal resource (labor) cost exceeds the wage rate. Graphically, the monopsonist's MRC curve lies above the average-cost-of- labor curve, or labor supply curve S, as is clearly shown in Figure 10.3.

Equilibrium Wage and Employment How many units of labor will the monopsonist hire, and what wage rate will it pay? To maximize profit, the monopsonist will employ the quantity of labor Qm in Figure 10.3 because at that quantity MRC and MRP are

equal (point b). The monopsonist next determines how much it must pay to attract these Qm workers. From the supply curve S, specifically point c,

it sees that it must pay wage rate Wm. Clearly, it need not pay a wage

equal to MRP; it can attract and hire exactly the number of workers it wants (Qm)

with wage rate Wm. And that is the wage that it will pay.