Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged

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." (Author's abstract, IAB-Doku) ((en))

Cite article

Bachmann, R., Bayer, C., Stüber, H. & Wellschmied, F. (2022): Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged. (IZA discussion paper 17302), Bonn, 67 p.