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

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Abstract/Contents

Abstract: This paper documents that a steeper size-wage relationship, reflecting monopsony power, leads to aggregate productivity losses. We use this insight to understand the persistent labor productivity differences between West and East Germany. We employ high-quality administrative data to show that productivity differences between East and West Germany are related to a compressed plant-size distribution in East Germany. What is more, we show that the plant-size distribution is more compressed in those sectors where the size-wage relationship is steeper. Using a model of plant entry and customer accumulation, we show that differences in the size-wage relationships explain 10 percentage points lower labor productivity in the East German private sector, that is, approximately one third of its total labor productivity difference.

Type of resource	text
Date created	August 27, 2021

DOI	https://doi.org/10.25740/jt227hy1909
Location	https://purl.stanford.edu/jt227hy1909

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License: This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).

Preferred citation: Bachmann, R., Bayer, C., Stuber, H., and Wellschmied, F. (2022). Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged. Stanford Digital Repository. Available at https://purl.stanford.edu/jt227hy1909

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