Working Paper: CEPR ID: DP17302
Authors: Rüdiger Bachmann; Christian Bayer; Heiko Stüber; Felix 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 predicts 10 percent lower aggregate labor productivity in East Germany.
Keywords: aggregate productivity; plant heterogeneity; unions; monopsony power; size-wage curve; monopolistic competition; customer capital; size distortions
JEL Codes: E20; E23; E24; J20; J42; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monopsony power (J42) | plant size (L25) |
| monopsony power (J42) | productivity (O49) |
| steeper size-wage curve (J31) | fewer customer acquisitions (M31) |
| fewer customer acquisitions (M31) | lower aggregate productivity (O49) |
| size-wage curve steepness (J31) | plant size distribution compression (D39) |
| plant size distribution compression (D39) | lower productivity (O49) |
| lack of large plants (Q24) | lower average wages (J31) |
| lack of large plants (Q24) | lower productivity levels (O49) |
| differences in size-wage curve (J31) | productivity gap (O49) |