IDEAS home Printed from https://ideas.repec.org/p/cep/cepdps/dp1545.html
   My bibliography  Save this paper

Specialization matters in the firm size-wage gap

Author

Listed:
  • Maria Molina-Domene

Abstract

This study applies the O-ring theory to explain the firm-size wage premium. It focuses on the joint role of the division of labor and employee characteristics. Including the firm heterogeneity of occupations in a standard wage regression with individual fixed effect shrinks the size coefficient by a third. Labor productivity follows a similar pattern as wages. The intuition is that individuals who work for large firms focus on a limited number of tasks become more efficient and productive, and earn higher wages. Additional predictions originating from the labor specialization hypothesis receive support from the data.

Suggested Citation

  • Maria Molina-Domene, 2018. "Specialization matters in the firm size-wage gap," CEP Discussion Papers dp1545, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1545
    as

    Download full text from publisher

    File URL: https://cep.lse.ac.uk/pubs/download/dp1545.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Petra Moog & Arndt Werner & Stefan Houweling & Uschi Backes-Gellner, 2015. "The impact of skills, working time allocation and peer effects on the entrepreneurial intentions of scientists," The Journal of Technology Transfer, Springer, vol. 40(3), pages 493-511, June.
    3. Susana Iranzo & Fabiano Schivardi & Elisa Tosetti, 2008. "Skill Dispersion and Firm Productivity: An Analysis with Employer-Employee Matched Data," Journal of Labor Economics, University of Chicago Press, vol. 26(2), pages 247-285, April.
    4. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 551-575.
    5. Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition, pages 299-322, National Bureau of Economic Research, Inc.
    6. Patrick Bolton & Mathias Dewatripont, 1994. "The Firm as a Communication Network," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 809-839.
    7. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    8. David H. Autor & Michael J. Handel, 2013. "Putting Tasks to the Test: Human Capital, Job Tasks, and Wages," Journal of Labor Economics, University of Chicago Press, vol. 31(S1), pages 59-96.
    9. Edward P. Lazear, 2009. "Firm-Specific Human Capital: A Skill-Weights Approach," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 914-940, October.
    10. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-1059, October.
    11. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
    12. Robert Gibbons & Michael Waldman, 2004. "Task-Specific Human Capital," American Economic Review, American Economic Association, vol. 94(2), pages 203-207, May.
    13. Erling Barth & James Davis & Richard B. Freeman, 2018. "Augmenting the Human Capital Earnings Equation with Measures of Where People Work," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 71-97.
    14. Kenneth R. Troske, 1999. "Evidence On The Employer Size-Wage Premium From Worker-Establishment Matched Data," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 15-26, February.
    15. Gary S. Becker, 1994. "Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition," NBER Books, National Bureau of Economic Research, Inc, number beck94-1, March.
    16. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    17. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
    18. Gary S. Becker, 1981. "A Treatise on the Family," NBER Books, National Bureau of Economic Research, Inc, number beck81-1, March.
    19. repec:eee:labchp:v:3:y:1999:i:pb:p:2165-2214 is not listed on IDEAS
    20. Guy Dumais & Glenn Ellison & Edward L. Glaeser, 2002. "Geographic Concentration As A Dynamic Process," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 193-204, May.
    21. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214, Elsevier.
    22. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    23. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 439-479.
    24. Green, Francis & Machin, Stephen & Manning, Alan, 1996. "The Employer Size-Wage Effect: Can Dynamic Monopsony Provide an Explanation?," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 433-455, July.
    25. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
    26. Sherwin Rosen, 2005. "Substitution And Division Of Labour," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 3, pages 29-51 World Scientific Publishing Co. Pte. Ltd..
    27. Jeremy T. Fox, 2009. "Firm-Size Wage Gaps, Job Responsibility, and Hierarchical Matching," Journal of Labor Economics, University of Chicago Press, vol. 27(1), pages 83-126, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Maria Molina-Domene, 2018. "Labor specialization as a source of market frictions," CEP Discussion Papers dp1580, Centre for Economic Performance, LSE.
    2. Shao, Lin & Sohail, Faisal & Yurdagul, Emircan, 2023. "Are working hours complements in production?," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    3. Molina-Domene, Maria, 2018. "Labor specialization as a source of market frictions," LSE Research Online Documents on Economics 91703, London School of Economics and Political Science, LSE Library.
    4. Žilvinas Martinaitis & Aleksandr Christenko & Jonas AntanaviÄ ius, 2021. "Upskilling, Deskilling or Polarisation? Evidence on Change in Skills in Europe," Work, Employment & Society, British Sociological Association, vol. 35(3), pages 451-469, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Molina-Domene, Maria, 2018. "Specialization matters in the firm size-wage gap," LSE Research Online Documents on Economics 88696, London School of Economics and Political Science, LSE Library.
    2. Molina-Domene, Maria, 2018. "Labor specialization as a source of market frictions," LSE Research Online Documents on Economics 91703, London School of Economics and Political Science, LSE Library.
    3. Maria Molina-Domene, 2018. "Labor specialization as a source of market frictions," CEP Discussion Papers dp1580, Centre for Economic Performance, LSE.
    4. David J. Deming, 2017. "The Growing Importance of Social Skills in the Labor Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1593-1640.
    5. Freund, L. B., 2022. "Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities," Janeway Institute Working Papers 2235, Faculty of Economics, University of Cambridge.
    6. Lane, Julia I. & Salmon, Laurie A. & Spletzer, James R., 2007. "Establishment Wage Differentials," Working Papers 403, U.S. Bureau of Labor Statistics.
    7. Thierry Lallemand & Robert Plasman & François Rycx, 2007. "The establishment-size wage premium: evidence from European countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(5), pages 427-451, December.
    8. Colin Green & John S. Heywood & Nikolaos Theodoropoulos, 2017. "Employer size and supervisor earnings: Evidence from Britain," University of Cyprus Working Papers in Economics 04-2017, University of Cyprus Department of Economics.
    9. Jaime Arellano-Bover, 2024. "Career Consequences of Firm Heterogeneity for Young Workers: First Job and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 42(2), pages 549-589.
    10. Feng, Shuaizhang, 2009. "Return to Training and Establishment Size: A Reexamination of the Size-Wage Puzzle," IZA Discussion Papers 4143, Institute of Labor Economics (IZA).
    11. 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.
    12. Binnur Balkan & Semih Tumen, 2016. "Firm-Size Wage Gaps along the Formal-Informal Divide: Theory and Evidence," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 55(2), pages 235-266, April.
    13. Jeremy T. Fox, 2009. "Firm-Size Wage Gaps, Job Responsibility, and Hierarchical Matching," Journal of Labor Economics, University of Chicago Press, vol. 27(1), pages 83-126, January.
    14. Wheeler, Christopher H., 2006. "Productivity and the geographic concentration of industry: The role of plant scale," Regional Science and Urban Economics, Elsevier, vol. 36(3), pages 313-330, May.
    15. Fackler, Daniel & Müller, Steffen & Stegmaier, Jens, 2017. "Explaining wage losses after job displacement: Employer size and lost firm rents," IWH Discussion Papers 32/2017, Halle Institute for Economic Research (IWH).
    16. Erling Barth & Harald Dale-Olsen, 2011. "Employer Size or Skill Group Size Effect on Wages?," ILR Review, Cornell University, ILR School, vol. 64(2), pages 341-355, January.
    17. Volker Grossmann, 2003. "Managerial Job Assignment and Imperfect Competition in Asymmetric Equilibrium," CESifo Working Paper Series 914, CESifo.
    18. Wheeler, Christopher H, 2001. "Search, Sorting, and Urban Agglomeration," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 879-899, October.
    19. Melanie Jones & Ezgi Kaya, 2023. "The UK gender pay gap: Does firm size matter?," Economica, London School of Economics and Political Science, vol. 90(359), pages 937-952, July.
    20. Måns Söderbom & Francis Teal & Anthony Wambugu, 2002. "Does firm size really affect earnings?," CSAE Working Paper Series 2002-08, Centre for the Study of African Economies, University of Oxford.

    More about this item

    Keywords

    firm size-wage gap; specialization; division of labor;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1545. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://cep.lse.ac.uk/_new/publications/discussion-papers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.