The old and new theories of monopsony have clashing predictions

Robinson’s (1933) theory of monopsony, of employer market power, is about fewness in the number of employers allow them to pay below-market wages. This means a minimum wage will raise wages, employment and, importantly, output. Her’s is a joint hypothesis. Employers will hire more workers and will produce more which means the firm must cut its prices to sell this additional output.

The new theories of monopsony such as in Manning’s Monopsony in Motion: Imperfect Competition in the Labour Market have ambiguous predictions about output and employment because they arise out of how the surplus from job matching is split. They acknowledge the possibility that some firms will close because they cannot afford the higher minimum wage rate.

The old monopoly monopsony theories are vindicated if output rises and prices fall as they must to sell the additional output. The new monopsony theories are vindicated if some firms close but employment does not fall much.

Because the new monopsony theories arise from a specific hypothesis about the labour market that it more difficult for larger employers to recruit, Kuhn (2005) argued that the title “Search Models with Ex-Ante Posted Wages in Motion, while considerably more accurate than Monopsony on Motion, is less catchy”.

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