The employment effects of minimum wages turn out less negative or even positive in more concentrated labor markets, where firms generally command more market power.
Although minimum wage regulations exist in many countries, the benefits and costs of these policies remain debated. Opponents warn that higher minimum wages can reduce jobs, while proponents argue that minimum wages not only boost incomes but, in certain labor markets, may also have little to no negative impact on employment. In monopsonistic labor markets—those dominated by a few employers—a higher minimum wage could even lead to positive employment effects.
In competitive labor markets, wages generally reflect workers’ productivity. Thus, without other ways to adjust, firms may respond to a minimum wage increase by cutting jobs, particularly among the least productive workers.
In monopsonistic labor markets, however, employers have the power to set wages below what workers would earn in a competitive environment. Here, a well-calibrated minimum wage can counteract monopsony power without harming employment. In fact, because firms in monopsonistic markets hold down wages by limiting the number of jobs they offer, raising the minimum wage may, in some cases, encourage firms to increase hiring.
In the last two decades, research has often found that minimum wage hikes have minimal or no adverse effects on employment, providing some support for the monopsony perspective.
In a recent study, I conduct a systematic test of the monopsony argument using social security data on Germany’s labor market. I measure labor market concentration to represent monopsony power, where higher concentration means employment is spread across fewer employers. In such markets, employers can more easily suppress wages because workers have few alternative job options.
My study focuses on 16 low-wage sectors where Germany’s Ministry of Labor and Social Affairs has set sector-specific minimum wages. Before these regulations, the data show that wages and employment were lower in highly concentrated labor markets, indicating monopsonistic behavior by firms. The introduction of sectoral minimum wages raised worker pay across the board, with the wage increase— or “bite”—being stronger in highly concentrated markets.
With these data, I thoroughly test the monopsony hypothesis. In slightly concentrated or competitive labor markets, introducing or raising sectoral minimum wages often led to reduced employment. Crucially, however, these negative employment effects diminished as labor market concentration increased. In highly concentrated, more monopsonistic markets, minimum wage hikes actually came along with positive employment effects. However, when the minimum wage reaches or exceeds the median wage in these low-wage sectors, even highly concentrated labor markets see these positive employment effects taper off.
Overall, these findings suggest that minimum wage effects on employment vary depending on the labor market’s structure.
This study has important policy implications. If antitrust measures and labor unions are not fully correcting for monopsony power, an appropriately set minimum wage can improve welfare, raising both wages and employment for lower-income workers in highly concentrated markets.
However, a universally applied minimum wage has trade-offs: while it may offset monopsony power in concentrated markets, it could also lead to job losses in more competitive markets. Furthermore, an excessively high minimum wage could hurt employment, even in highly concentrated labor markets.
© Martin Popp
Martin Popp is post-doctoral Researcher at the Institute for Employment Research (IAB) in Nuremberg, Germany.
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