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Should Workers Care about Firm Size?

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  • Ana Ferrer
  • Stéphanie Lluis

Abstract

The authors analyze how firms of different sizes reward measured skills and unmea¬sured ability. The empirical methodology, based on nonlinear instrumental variable estimation, permits direct estimation of the returns to unmeasured ability by firm size. An analysis of panel data from the Canadian Survey of Labour and Income Dynamics for two periods, 1993-1998 and 1996-2001, reveals statistically significant differences between firms of different sizes. In particular, returns to unmeasured ability are higher in medium-sized firms than in either small firms or large firms. The authors find that the firm-size wage gap and the differential in returns to unmeasured ability between small and medium-sized firms is mainly explained by ability sorting. The fact that larger firms reward ability less than medium-sized firms is consistent with an explanation based on monitoring costs. When firms become "too large," monitoring costs may prevent them from rewarding ability directly through wages.

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Bibliographic Info

Article provided by ILR Review, Cornell University, ILR School in its journal ILR Review.

Volume (Year): 62 (2008)
Issue (Month): 1 (October)
Pages: 104-125

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Handle: RePEc:ilr:articl:v:62:y:2008:i:1:p:104-125

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References

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  1. Stéphanie Lluis, 2002. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data C2-3, International Conferences on Panel Data.
  2. Kenneth R Troske, 1994. "Evidence on the Employer Size-Wage Premium From Worker-Establishment Matched Data," Working Papers, Center for Economic Studies, U.S. Census Bureau 94-10, Center for Economic Studies, U.S. Census Bureau.
  3. Agell, Jonas, 2003. "Why are Small Firms Different? Managers' Views," Research Papers in Economics, Stockholm University, Department of Economics 2003:9, Stockholm University, Department of Economics.
  4. Lemieux, Thomas, 1998. "Estimating the Effects of Unions on Wage Inequality in a Panel Data Model with Comparative Advantage and Nonrandom Selection," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 16(2), pages 261-91, April.
  5. Garen, John E, 1985. "Worker Heterogeneity, Job Screening, and Firm Size," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(4), pages 715-39, August.
  6. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2002. "Comparative Advantage, Learning, and Sectoral Wage Determination," CIRANO Working Papers, CIRANO 2002s-35, CIRANO.
  7. Luojia Hu, 2003. "The hiring decisions and compensation structures of large firms," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(4), pages 663-681, July.
  8. Rene Morissette, 1993. "Canadian Jobs and Firm Size: Do Smaller Firms Pay Less?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 26(1), pages 159-74, February.
  9. Idson, Todd L & Feaster, Daniel J, 1990. "A Selectivity Model of Employer-Size Wage Differentials," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 8(1), pages 99-122, January.
  10. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(2), pages 831-80, June.
  11. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  12. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9503, Universite de Montreal, Departement de sciences economiques.
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Citations

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Cited by:
  1. Lallemand, Thierry & Rycx, Francois, 2005. "Establishment Size and the Dispersion of Wages: Evidence from European Countries," IZA Discussion Papers 1778, Institute for the Study of Labor (IZA).
  2. Naci H. Mocan & Erdal Tekin, 2009. "Obesity, Self-esteem and Wages," NBER Working Papers 15101, National Bureau of Economic Research, Inc.
  3. Alexander Muravyev, 2007. "Firm Size, Wages and Unobserved Skills: Evidence from Dual Job Holdings in the UK," Discussion Papers of DIW Berlin 681, DIW Berlin, German Institute for Economic Research.
  4. Thierry Lallemand & Robert Plasman & François Rycx, 2007. "The establishment-size wage premium: evidence from European countries," Empirica, Springer, Springer, vol. 34(5), pages 427-451, December.
  5. Justina A.V. Fischer & Alfonso Sousa-Poza, 2006. "The Institutional Determinants of Early Retirement in Europe," University of St. Gallen Department of Economics working paper series 2006, Department of Economics, University of St. Gallen 2006-08, Department of Economics, University of St. Gallen.
  6. Lixin Cai & C. Jeffrey Waddoups, 2009. "The Role of Unobserved Heterogeneity and On-the-Job Training in the Employer Size-Wage Effect: Evidence from Australia," Working Papers, University of Nevada, Las Vegas , Department of Economics 0915, University of Nevada, Las Vegas , Department of Economics.
  7. Thierry Lallemand & François Rycx, 2007. "Employer Size and the Structure of Wages: A Critical Survey," Reflets et perspectives de la vie économique, De Boeck Université, De Boeck Université, vol. 0(2), pages 75-87.
  8. Rui Baptista & Francisco Lima & Miguel Preto, 2013. "Entrepreneurial skills and workers’ wages in small firms," Small Business Economics, Springer, Springer, vol. 40(2), pages 309-323, February.
  9. Robertas Zubrickas, 2011. "Managerial accountability for payroll expense and firm-size wage effects," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 474, Institute for Empirical Research in Economics - University of Zurich.
  10. Cerejeira, João & Guimarães, Paulo, 2012. "The price of unobservables and the employer-size wage premium," Economics Letters, Elsevier, Elsevier, vol. 117(3), pages 878-880.

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