A rural care-home company is the main employer of care assistants within travelling distance of several villages. Its managers recorded the labour market sh...
Question 1 Report
A rural care-home company is the main employer of care assistants within travelling distance of several villages. Its managers recorded the labour market shown in Fig. 1 before opening a second home. The upward-sloping curve S is the supply of care assistants to the company. Because the firm faces the whole local supply curve, it must offer a higher wage to attract extra workers. The marginal cost of labour curve is labelled MCL, while MRP shows the extra revenue generated by one more care assistant.
(a) Identify the type of labour market shown in Fig. 1. [2]
(b) Explain why the MCL curve lies above the supply curve. [4]
(c) Describe the likely effect on the care-home company's labour costs if it raises its wage to recruit more assistants. [3]
(d) Which government policy could reduce the employer's power in this local labour market? [3]
Answer Details
(a) This is a monopsony labour market: the care-home company is the single dominant buyer of labour and faces the local supply curve of care assistants. [2 marks]
(b) To recruit one more care assistant, the company must raise the wage it offers. It normally has to pay this higher wage to its existing assistants as well as to the new recruit. Total wage costs therefore rise by more than the wage paid to the extra worker. Marginal cost of labour is consequently above the wage shown on the supply curve. [4 marks]
(c) If the company raises its wage, new recruits are paid more, but existing assistants also receive the higher wage. Total labour costs therefore increase, potentially sharply. [3 marks]
(d) A statutory minimum wage can prevent the employer paying below a legal wage floor. Alternatively, policies that improve worker mobility, such as better transport, give workers access to alternative employers and weaken the company's monopsony power. [3 marks]
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