Discussion Paper Details

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

Author(s): Rüdiger Bachmann, Christian Bayer, Heiko Stüber and Felix Wellschmied

Publication Date: May 2022

Keyword(s): aggregate productivity, customer capital, monopolistic competition, Monopsony Power, plant heterogeneity, Size distortions, size-wage curve and Unions

Programme Area(s): Macroeconomics and Growth

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.

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Bibliographic Reference

Bachmann, R, Bayer, C, Stüber, H and Wellschmied, F. 2022. 'Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged'. London, Centre for Economic Policy Research.