The fall and rebound of average establishment size in West Germany

Arbeitspapier

In West Germany, the average size of establishments declined during the 1990s and started to increase again in the late 2000s, while the employer size wage premium followed the opposite trajectory. In this paper, we show that these two developments are interrelated. More precisely, our results suggest that variations in the employer size wage premiums induced establishments to vary their employment level, consistent with monopsony power on the labor market. Moreover, our regional analyses show that average establishment size correlates positively with GDP per capita. We rationalize these findings with a heterogeneous firms model with monopsonistic competition in the labor market, stemming from the household's love-of-variety preferences for employers. Both empirics and theory reveal that higher size wage premiums decrease average establishment size by downsizing incumbent establishments and triggering the entry of small establishments, thus also negatively affecting aggregate productivity.

Object Details

• ISBN: 978-3-95729-984-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 11/2024

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Wage Level and Structure; Wage Differentials ; Monopsony; Segmented Labor Markets ; Firm Performance: Size, Diversification, and Scope
• Subject: Establishment Size ; Size Wage Premium ; Productivity ; Labor MarketPower ; Germany

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kovalenko, Tim ; Sauerbier, Timo ; Schröpf, Benedikt
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2024

Further information

• Last update: 10.03.2025, 11:44 AM CET