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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
  • 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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    Cited by:

    1. 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.
    2. 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.).
    3. Akcigit, Ufuk & Alp, Harun & Diegmann, André & Serrano-Velarde, Nicolas, 2024. "Committing to grow: Employment targets and firm dynamics," IWH Discussion Papers 17/2023, Halle Institute for Economic Research (IWH), revised 2024.
    4. Gulyas, Andreas & Meier, Matthias & Ryzhenkov, Mykola, 2024. "Labor market effects of monetary policy across workers and firms," European Economic Review, Elsevier, vol. 166(C).
    5. 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.
    6. Akcigit, Ufuk & Alp, Harun & Diegmann, Andre & Serrano-Velarde, Nicolas, 2023. "Committing to Grow: Privatizations and Firm Dynamics in East Germany," CEPR Discussion Papers 18431, C.E.P.R. Discussion Papers.
    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.

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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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