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Firm size and wages

In: Handbook of Labor Economics


  • Oi, Walter Y.
  • Idson, Todd L.


Jobs differ along many dimensions including firm size. The wage gap due to firm size of 35% is comparable to the gender wage gap of 36% for men over women and greater than the wage gap of 14% for whites over black employees. The size-wage premium is larger for men and varies across industries. It is larger in the US than in other industrialized countries. Large firms demand a higher quality of labor defined by such observable characteristics as education, job tenure, and a higher fraction of full-time workers. Part 3 examines three behavioral explanations. (1) Productive employees are matched with able entrepreneurs to minimize the sum of wages and monitoring costs. (2) Big firms pay efficiency wages to deter shirking. (3) Big firms adopt a discretionary wage policy to share rents, or in Slichter's words, "Wages over a considerable range reflect managerial discretion. When management can easily afford to pay high wages, they tend to do so." We advance a productivity hypothesis. A large organization sets a higher performance standard that raises labor productivity but has to be supported by a compensating wage difference. In the service industries, the pace of work depends on the customer arrival rate. The economies of massed reserves generates a positive wage-size profile. The capital/labor ratio is higher in bigger firms which also are early in adopting new technologies. Both forces raise the demand for skilled labor where skill and productivity are often unobservable traits. Production organized around teams calls for conformance to common work rules which result in paying rents to infra-marginal team members. The odds of survival are higher for big firms which enable them to "produce" more durable employees who are more productive because they get more training. Firm size is a function of external market forces, technology, managerial decisions, and luck. The surplus of revenues over labor costs per employee is positively related to firm size for three reasons, lower prices for non-labor inputs, possibly greater market power, or larger overhead costs to amortize the sunk costs for capital and firm -specific work force. Rent sharing cannot be dismissed as an explanation for the wage-size premium. Taxation and regulation can also affect the size distribution of firms. The organization of work and the selection of employees (whose productive traits are not always observable) are responsible for the positive relation between wages and employer size.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:labchp:3-33

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    JEL classification:

    • J0 - Labor and Demographic Economics - - General


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