We argue that models of oligopsony or monopsonistic competition provide insights and explanation for many empirical phenomena in labor markets. Using a simple model with job differentiation and preference heterogeneity, we illustrate how such models can be employed to explain the existence of wage dispersion, the persistence of labor market discrimination, market failures in the provision of training and the anomalous employment effects of minimum wages.

Recent empirical work on the effects of minimum wages has called into question the conventional wisdom that minimum wages invariably reduce employment. We develop a model of monopsonistic competition with free entry to analyse the effects of minimum wages, and our predictions ®t the empirical results closely. Under monopsonistic competition, we ®nd that a rise in the minimum wage raises employment per ®rm, causes ®rm exit and may increase or reduce industry employment. Minimum wages increase welfare if they raise industry employment but welfare effects are ambiguous if employment falls.

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