Monopsony and the efficiency of labour market interventions

Implicit in many discussions of labour market policy is the assumption that, in the absence of interventions, the operation of the labour market is well-approximated by the perfectly competitive model. The merits or demerits of particular policies is then seen as a trade-off between efficiency and equality. This paper analyses the impact of a variety of policies û the minimum wage, trade unions, unemployment insurance, progressive income taxation and restrictions on labour contracts û on efficiency when labour markets in the absence of intervention are monopsonistic and not perfectly competitive. A simple version of the Burdett and Mortensen (1998) model is used for this purpose.