The Grapes of Wrath by John Steinbeck: Monopsony Example
The book the Grapes of Wrath by John Steinbeck illustrates a case of a monopsony market. Steinbeck describes a story of a family that moves from their rural home in Oklahoma in search of jobs in California. While the promise of living to their “American dream” had appeared visible on their onset, upon arriving in California, they find that there are so many people looking for employment and few people offering jobs. Simply, there are so many people selling labor on various skills and single employers for each of these skills. This scenario is called monopsony. Because of their control over employment, many people are willing to accept low pay depending on their personal needs.
Generally, a monopsony market is one where there are many sellers and a single buyer. In the labor market, such as in the example given by Steinbeck, a large company in a small town can influence wage rate since it is usually the only employer. This influence on wage rate by one company cannot be experienced in towns that have many employers.
Working off a Monopsony
A monopolist seeks to maximize the total value derived from buying an extra unit of a commodity less the cost of the commodity: V(Q)-E(Q) (Chia-Hui 1-2). The marginal value represents the additional benefit that a buyer gets from buying an extra commodity. Marginal expenditure (ME) represents the additional cost incurred from buying an extra unit of a product. The average expenditure (AE) represents the market price paid for each unit of the commodity, which is determined by the market supply. Since a monopolist is the only employer in the market, if it wishes to attract an extra employee it must increase its marginal cost of the labor. However, this increase also forces the monopsony to increase the wage level of existing employees to the price needed to attract the extra employee (Staiger, Spetz, and Phibbs 211-234). As a result, the marginal cost of labor is always greater than the existing average cost of labor. The following diagram will be used to illustrate a monopsony.
Wages per hour
Marginal Cost of Labor
Supply (Average cost of labor) $25 Competitive equilibrium
3 4 5 Quantity of Labor
The optimal quantity of the monopsony will occur at the intersection between marginal cost of labor and the marginal revenue per product, which is the demand for labor. The optimal price that the monopolist will pay is found at the supply curve, on the intersection of the vertical dotted line that drops from the marginal cost of labor. Therefore, the monopsony will pay all employees $15 and employ only 3 employees. At this level, he will be exploiting employees and maximizing the total value derived from hiring an extra worker. On the contrary, a competitive market would employ 4 workers ad pay them $25.
The effect of this market on the supplier is that a monopsony leads to his/her exploitations. Generally, this occurs because the monopsony buys the products at the point where he/she earns maximum value. To achieve this goal, he/she does not purchase the competitive equilibrium number of good or services. Further, the monopsony does not pay the equilibrium price for the goods. The monopsony benefits with this market structure since he earns more value by exploiting suppliers.
Chia-Hui, C. Principles of Macroeconomics. Massachusetts Institute of Technology, 2007.
Staiger, D., Spetz, J., and Phibbs, C. “Is There Monopsony in the Labor Market? Evidence From a Natural Experiment.” Journal of Labor Economics, vol. 28, no. 2, 2010, pp. 211-234.