A monopsonist in a labour market faces an upward-sloping labour supply curve. Because wages must rise to attract additional workers, the extra cost of hiring one more worker typically exceeds that worker’s wage.

Core idea: wage vs marginal factor cost under monopsony

What the wage represents

In labour markets, the wage is the per-worker (or per-hour) payment the firm must offer to employ a given quantity of labour. For a monopsonist, the wage is not “given” by the market; it depends on how many workers the firm chooses to hire.

What marginal factor cost measures

The key distinction is that MFC is the change in total labour cost, not merely the wage of the last worker.

Why an upward-sloping labour supply makes MFC exceed the wage

The monopsonist must “bid up” wages to expand employment

Because the firm is large relative to the local labour market, it effectively faces the market labour supply curve. If that supply curve slopes upward, then:

• To hire more workers, the firm must offer a higher wage.

• That higher wage is typically the wage the firm must pay for the new employment level.

The firm’s total wage bill rises for more than one reason

When employment increases from $L$ to $L+1$, total labour cost rises because:

• The firm pays the new worker the higher wage.

• The firm often must also pay the higher wage on existing workers (or on many of them), depending on how wages are set within the market/firm.

This is why the specification statement holds: the marginal factor cost of the additional worker exceeds the wage paid to that new worker.

Formalising the relationship between wage and MFC

Thinking in terms of total labour cost helps separate “price per worker” from “extra cost of expanding employment.” Let the wage be a function of employment, $w(L)$.

Because an upward-sloping supply implies $\frac{dw}{dL}>0$, the term $L\cdot\frac{dw}{dL}$ is positive, so $MFC(L)>w(L)$ for a monopsonist hiring on an upward-sloping labour supply curve.

This monopsony equilibrium graph plots the labor supply curve $S$ (the wage schedule), the marginal factor cost curve $MFC$ above it, and the marginal revenue product curve $MRP$ downward sloping. The firm hires where $MRP=MFC$ (at $L_m$), but the wage it pays is the amount required to attract $L_m$ workers, read from the supply curve as $W_m$. The visual makes clear why the marginal cost of the last hire exceeds that worker’s wage when labor supply is upward sloping. Source

Interpreting the MFC curve relative to the labour supply curve

Labour supply as the “wage” (average factor cost) curve

The labour supply curve to the firm shows the wage required to employ each quantity of labour. In this context it is also the firm’s average factor cost of labour: total labour cost per worker at that employment level.

Why MFC lies above labour supply

For each additional worker, the monopsonist must move up the labour supply curve to a higher wage. Therefore:

• The wage for the marginal worker is the new per-worker rate, $w(L)$.

• The MFC includes that wage plus the added cost created by raising the wage to reach $L$.

As a result:

• MFC is steeper and higher than the labour supply (wage/AFC) curve whenever labour supply is upward sloping.

This diagram shows an upward-sloping labor supply curve (the wage/average factor cost) and a steeper marginal cost of labor curve ($MC_L$, i.e., MFC) positioned above it. The vertical gap emphasizes that when the firm expands employment, it must raise the wage for more than just the marginal worker, so $MFC>w$. It also depicts monopsony hiring where labor demand intersects $MC_L$, with the wage then read from the supply curve at that quantity. Source

When might MFC not exceed the wage?

The “MFC greater than wage” result depends on the firm facing an upward-sloping supply and having to raise the wage to expand employment. Conceptually:

• If labour supply were perfectly elastic to the firm (a flat supply curve), then $\frac{dw}{dL}=0$ and $MFC=w$.

• If wage-setting practices allowed the firm to pay different wages to identical workers without needing to raise pay for others, the gap between MFC and the new worker’s wage could be smaller; the core monopsony case assumes a single wage associated with each employment level.

Common AP-level interpretations to keep straight

• Wage: the per-worker payment at a given employment level (read from labour supply).

• MFC: the marginal (extra) cost of increasing employment by one worker; under monopsony, it reflects the upward pressure on wages required to attract more labour.

• The statement “MFC exceeds the wage paid to the new worker” is about incremental total cost, not about paying the last worker more than the posted wage.