Discussion paper

DP17302 Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged

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.

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Citation

Bachmann, R, C Bayer, H Stüber and F Wellschmied (eds) (2022), “DP17302 Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged”, CEPR Press Discussion Paper No. 17302. https://new.cepr.org/publications/dp17302