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