When employers face a trade-off between being large and paying low wages—and in this sense have monopsony power—some productive employers decide against building large business networks, 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 steeper size-wage curves, invest less in their business networks, remain smaller, and are less productive. A model with labor market monopsony, product market power, and business network investments matching these features of the data predicts a ten percent lower aggregate labor productivity in East Germany.