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Product Market and the Size-Wage Differential

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Author Info
Shouyong Shi (Indiana University, U.S.A. and Center of Research on Economic Fluctuations and Employment (CREFE), Quebec, Canada)

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Abstract

Using directed search to model the product market and the labor market, I show that large plants can pay higher wages to homogeneous workers and earn higher expected profit per worker than small plants, although plants are identical except size. A large plant charges a higher price for its product and compensates buyers with a higher service probability. To capture this size- related benefit, large plants try to become larger by recruiting at high wages. This size-wage differential survives labor market competition because a high wage is harder to get than a low wage. Moreover, the size-wage differential increases with the product demand when demand is initially low and falls when demand is already high. Copyright 2002 by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Resarch Association

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File URL: http://openurl.ingenta.com/content?genre=article&issn=0020-6598&volume=43&spage=21
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 43 (2002)
Issue (Month): 1 (February)
Pages: 21-54
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Handle: RePEc:ier:iecrev:v:43:y:2002:i:1:p:21-54

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  1. John Kennes, 2004. "Competitive Auctions: Theory and Application," CAM Working Papers 2004-17, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
    Other versions:
  2. Falkinger, Josef & Grossmann, Volker, 2002. "Workplaces in the Primary Economy and Wage Pressure in the Secondary Labor Market," IZA Discussion Papers 523, Institute for the Study of Labor (IZA). [Downloadable!]
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  3. Shouyong Shi, 2000. "The Research Agenda: Search Theory beyond the Matching Function," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April. [Downloadable!]
  4. Benoit Julien & John Kennes & Ian King, 2001. "Residual Wage Disparity and Coordination Unemployment," CAM Working Papers 2004-20, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2004. [Downloadable!]
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