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The Role of Expectation in Job Search and Firm Size Effect on Wages

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  • Takako Fujiwara-Greve

    (Keio University)

  • Henrich R. Greve

    (University of Tsukuba)

Abstract

One of the most puzzling facts in economics is the firm size-wage effect. After controlling for the observable characteristics of workers (age, gender, education, residence etc.), firms (industry, occupation, work conditions etc.) and negotiation effect (unionization), one still finds that the sheer size of a firm increases the wage, contrary to the one-good one-price doctrine. We provide a simple dynamic game model of wage determination to give a new rationale to the firm size-wage effect. We think that the wages are not market clearing prices but strategies by firms. Firms choose wages to control workers' search behavior. The essential feature of the model is that a large firm's history of wages is observable to all the current and future workers, while a small firm is not visible and only its current offer is observable. Therefore a small firm is expected to be a myopic low-wage payer, and its workers search and quit often. A large firm can prevent search if it maintained a high wage throughout the past, thus making workers expect high future wages. In this way, the firm size determines the worker expectations of its future wages, which changes the quit rate and equilibrium wages. To give additional support to our theoretical result, we test a new aspect of firm size-wage effect. Since the effect on wage levels are extensively studied, we derive two main hypotheses on wage gains after job changes. (H1) The proportion of firms that are larger than the previous employer increases the wage gain. (H2) The size of the previous employer decreases the wage gain. The firm size distribution effect (H1) is a new test. We obtain supports for both. Thus we conclude that the wages are strategies and affected by how workers utilize the firm size information in changing jobs. (297 words.)

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0857.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0857

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  1. Jeremy I. Bulow & Lawrence H. Summers, 1985. "A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment," NBER Working Papers 1666, National Bureau of Economic Research, Inc.
  2. 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.
  3. Martinelli, Cesar, 1997. "Small firms, borrowing constraints, and reputation," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 91-105, May.
  4. Melvyn G. Coles, 2001. "Equilibrium Wage Dispersion, Firm Size and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 159-187, January.
  5. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High-Wage Workers and High-Wage Firms," CIRANO Working Papers 94s-23, CIRANO.
  6. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  7. Jong-Il Kim & Lawrence J. Lau, 1996. "The sources of Asian Pacific economic growth," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 448-54, April.
  8. Thaler, Richard H, 1989. "Interindustry Wage Differentials," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 181-93, Spring.
  9. Jacob Mincer, 1986. "Wage Changes in Job Changes," NBER Working Papers 1907, National Bureau of Economic Research, Inc.
  10. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  11. Jacob Mincer & Boyan Jovanovic, 1979. "Labor Mobility and Wages," NBER Working Papers 0357, National Bureau of Economic Research, Inc.
  12. Kenneth R. Troske & Kimberly Bayard, 1999. "Examining the Employer-Size Wage Premium in the Manufacturing, Retail Trade, and Service Industries Using Employer-Employee Matched Data," American Economic Review, American Economic Association, vol. 89(2), pages 99-103, May.
  13. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
  14. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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