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2. In a monopsonistic market, there appears to be a labor shortage. Assume as a result,...


2. In a monopsonistic market, there appears to be a labor shortage. Assume as a result, new people enter the market seeking employment. Compare the old and the new equilibrium. Particularly, what happens to E;w? Are the new migrant workers who do not get a job unemployed or simply out of the labor force?
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Answer #1

This is a complex question in economics. If there is labour shortage and new people enter into the market for employment as compared to competitive equilibrium it shows that they will not get Jobs. The total earnings E is less in the monopoly market. But w is higher in monopoly as firm produces special products of variety with lesser quantity.

Now there are some theories that what will this surplus labour do? One of the theory is unemployed workers will form curtle which is known as monopsony and if monopsony is formed equivalent bargaining will prevail in the market and thus the problem can be solved.

Another theory suggests they will be employed as a disguised labour.(by Louis model of underdeveloped countries)

Another theory suggests that the labour force not participating will remain unemployed.

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