Final answer:
In a monopsony labor market, an employer with market power will hire fewer workers and offer lower wages compared to a competitive market, where wages and employment levels are determined by the intersection of labor supply and demand.
Step-by-step explanation:
When comparing a monopsony market to a competitive labor market, the monopsony has a distinct effect on both the wage and the level of employment. In a competitive market, equilibrium is reached where supply equals demand (D₁ = S₁), with the market hiring Lc workers at Wc wage. However, in a monopsony, the single employer has market power and can influence the wage rate. Given that the monopsony must offer higher wages to attract additional labor, the marginal cost of labor is higher than the actual wage paid to the previous worker. Consequently, to maximize profits, the monopsonist will hire fewer workers compared to a competitive market, at a point where the marginal cost of labor equals their demand for labor (MC = D). This results in hiring fewer workers (Lm < Lc) and paying a lower wage (Wm < Wc).
Although a pure monopsony is rare, many employers wield some degree of market power, resulting in qualitatively similar outcomes to a monopsony, albeit to a lesser extent. Firms with market power in labor markets will tend to hire fewer workers and pay lower wages than what would prevail under perfect competition. Thus, the presence of monopsony power in a labor market leads to lower employment levels and lower equilibrium wages compared to a competitive labor market.