Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged

Ruediger Bachmann, Christian Bayer, Stüber, Heiko and Felix Wellschmied

No 17302, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: When employers face a trade-off between growing large and paying low wages---that is, when they have monopsony power---some productive employers will decide to acquire fewer customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face a steeper size-wage curve, invest less into marketing, and remain smaller. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts 10 percent lower aggregate labor productivity in East Germany.

Keywords: Aggregate productivity; Plant heterogeneity; Unions; Monopsony power; Size-wage curve; Monopolistic competition; Customer capital; Size distortions (search for similar items in EconPapers)
JEL-codes: E20 E23 E24 J20 J42 J50 (search for similar items in EconPapers)
Date: 2022-05
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Related works:
Working Paper: Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged (2024)
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged (2023)
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East-Germany Has Not Converged (2022)
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged (2022)
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