Research on Monopsonistic Models and Magnitude of Minimum Wage’s Effects on Employment Level

Abstract

Modern labour economics has been focusing on the topic of the effects of minimum wage on employment level. Empirical studies have found that an introduction of minimum wage may increase employment level under certain circumstances. Some theoretical researches are also developed later. Most of these theoretical studies are based on the model of monopsonistic competition, which seems to be commonly existing in the general market. However, it seems that several problems still exist within the models. First, a plausible assumption that firms will always earn a normal profit may result in our underestimation in minimum wage’s positive effect on employment levels. This paper would discuss a possibility that firms usually earn sustained supernormal profit in the general market in reality. Second, the original model of monopsony supposes that the marginal revenue curve of labour would not shift after an introduction of minimum wage. However, in the real world settings, companies may well adjust their employment levels of other factors such as capital after the introduction of minimum wage, and this process may influence the MR curve for labour. This paper, however, takes account of this effect and tries to establish a more accurate model to anticipate minimum wage’s effect on labour employment levels for each firm.