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

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.

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Rüdiger Bachmann (University of Notre Dame)

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IWH, conference room, Leipziger Straße 100 and via Zoom

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Rüdiger Bachmann is Stepan Family College Professor of Economics, Graduate Placement Director at University of Notre Dame. His research area is macroeconomics, where he specializes in the macroeconomics of heterogeneous agents. He is also interested in the implications of uncertainty and expectation formation on macroeconomic outcomes.

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.

To join the lecture via ZOOM, please contact Javier Miranda.