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

Author

Listed:
  • Bachmann, Rüdiger
  • Bayer, Christian
  • Stüber, Heiko
  • Wellschmied, Felix

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," CEPR Discussion Papers 17302, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17302
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    2. Isabella Maassen & Filip Mellgren & Jonas Overhage, 2025. "Monopsony Power and Creative Destruction: Static Loss, Faster Growth," CESifo Working Paper Series 11820, 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. Akcigit, Ufuk & Alp, Harun & Diegmann, André & Serrano-Velarde, Nicolas, 2025. "Committing to grow: Employment targets and firm dynamics," IWH Discussion Papers 17/2023, Halle Institute for Economic Research (IWH), revised 2025.
    5. Balleer, Almut & Duernecker, Georg & Forstner, Susanne & Goensch, Johannes, 2023. "Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap," CEPR Discussion Papers 18005, C.E.P.R. Discussion Papers.
    6. 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.
    7. Kovalenko, Tim & Sauerbier, Timo & Schröpf, Benedikt, 2024. "The fall and rebound of average establishment size in West Germany," Discussion Papers 11/2024, Deutsche Bundesbank.
    8. 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.
    9. Gulyas, Andreas & Meier, Matthias & Ryzhenkov, Mykola, 2024. "Labor market effects of monetary policy across workers and firms," European Economic Review, Elsevier, vol. 166(C).
    10. Konysev, Vasilij & Fehrle, Daniel, 2025. "To converge or not to converge: Accounting for the German reunification," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325462, Verein für Socialpolitik / German Economic Association.

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    Keywords

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    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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