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

Author

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  • Bachmann, Rüdiger

    (University of Notre Dame)

  • Bayer, Christian

    (University of Bonn)

  • Stüber, Heiko

    (Hochschule der Bundesagentur für Arbeit (HdBA))

  • Wellschmied, Felix

    (Universidad Carlos III de Madrid)

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.

Suggested Citation

  • Bachmann, Rüdiger & Bayer, Christian & Stüber, Heiko & Wellschmied, Felix, 2022. "Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged," IZA Discussion Papers 15293, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15293
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    Cited by:

    1. Kovalenko, Tim & Sauerbier, Timo & Schröpf, Benedikt, 2023. "The fall and rebound of average establishment size in West Germany," Discussion Papers 126, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    2. Almut Balleer & Georg Duernecker & Susanne Forstner & Johannes Goensch, 2023. "Biased Expectations and Labor Market Outcomes: Evidence from German Survey Data and Implications for the East-West Wage Gap," CESifo Working Paper Series 10336, CESifo.
    3. Ufuk Akcigit & Harun Alp & André Diegmann & Nicolas Serrano-Velarde, 2023. "Committing to Grow: Privatizations and Firm Dynamics in East Germany," International Finance Discussion Papers 1382, Board of Governors of the Federal Reserve System (U.S.).
    4. Rüdiger Bachmann & Christian Bayer & Heiko Stüber & Felix Wellschmied, 2022. "Monopsone machen Unternehmen nicht nur klein, sondern auch unproduktiv: Warum die Wirtschaft Ostdeutschlands nicht konvergiert ist," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 29(05), pages 09-12, October.

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    More about this item

    Keywords

    aggregate productivity; plant heterogeneity; unions; monopsony power; size-wage curve; monopolistic competition; customer capital; size distortions;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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