Christian Bayer, University of Bonn
Christian Bayer, University of Bonn will present “Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged.” (with R. Bachmann, H. Stueber and F. Wellschmied).
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 produces 10 percent lower aggregate labor productivity in East Germany.