Minimum wages in concentrated labor markets

Economists increasingly refer to monopsony power to reconcile the absence of negativeemployment effects of minimum wages with theory. However, systematic evidence for themonopsony argument is scarce. In this paper, I perform a comprehensive test of monop-sony theory by using labor market concentration as a proxy for monopsony power. Labormarket concentration turns out substantial in Germany. Absent wage floors, a 10 per-cent increase in labor market concentration makes firms reduce wages by 0.5 percentand employment by 1.6 percent, reflecting monopsonistic exploitation. In line with per-fect competition, sectoral minimum wages lead to negative employment effects in slightlyconcentrated labor markets. This effect weakens with increasing concentration and, ulti-mately, becomes positive in highly concentrated or monopsonistic markets. Overall, theresults lend empirical support to the monopsony argument, implying that conventionalminimum wage effects on employment conceal heterogeneity across market forms.