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Human Capital Risk and the Firmsize Wage Premium


  • Danny Leung
  • Alexander Ueberfeldt


Why do employed persons in large firms earn more than employed persons in small firms, even after controlling for observable characteristics? Complementary to previous results, this paper proposes a mechanism that gives an answer to this question. In the model, individuals accumulate human capital and are exposed to the risk of losing some of their human capital as they change jobs, voluntarily or involuntarily. The model, calibrated to the United States and Canada, accounts for one-third of the firmsize wage premium. Regarding the earnings gap between Canada and the United States, the model finds that it is solely due to differences in labor market uncertainty.

Suggested Citation

  • Danny Leung & Alexander Ueberfeldt, 2008. "Human Capital Risk and the Firmsize Wage Premium," Staff Working Papers 08-33, Bank of Canada.
  • Handle: RePEc:bca:bocawp:08-33

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    References listed on IDEAS

    1. Neumark, David & Polsky, Daniel & Hansen, Daniel, 1999. "Has Job Stability Declined Yet? New Evidence for the 1990s," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages 29-64, October.
    2. Winter-Ebmer, Rudolf, 2001. "Firm Size, Earnings, and Displacement Risk," Economic Inquiry, Western Economic Association International, vol. 39(3), pages 474-486, July.
    3. Statistics Canada, 2002. "The Evolution of Job Stability in Canada: Trends and Comparisons to U.S. Results," Analytical Studies Branch Research Paper Series 2002162e, Statistics Canada, Analytical Studies Branch.
    4. tom krebs, 2004. "welfare cost of business cycles when markets are incomplete," Econometric Society 2004 North American Summer Meetings 283, Econometric Society.
    5. Hobijn, Bart & Sahin, Aysegül, 2009. "Job-finding and separation rates in the OECD," Economics Letters, Elsevier, vol. 104(3), pages 107-111, September.
    6. Audra J. Bowlus & Chris Robinson, 2005. "The Contribution of Post-Secondary Education to Human Capital Stocks in Canada and the United States," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20051, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    7. Rogerson, Richard & Schindler, Martin, 2002. "The welfare costs of worker displacement," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1213-1234, September.
    8. Statistics Canada, 2007. "Earnings Losses of Displaced Workers: Canadian Evidence from a Large Administrative Database on Firm Closures and Mass Layoffs," Analytical Studies Branch Research Paper Series 2007291e, Statistics Canada, Analytical Studies Branch.
    9. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
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    11. Tom Krebs, 2007. "Job Displacement Risk and the Cost of Business Cycles," American Economic Review, American Economic Association, vol. 97(3), pages 664-686, June.
    12. 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.
    13. Audra J. Bowlus, 1998. "U.S.-Canadian Unemployment and Wage Differences Among Young Low-Skilled Males in the 1980s," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 437-464, May.
    14. Dan A. Black & Brett J. Noel & Zheng Wang, 1999. "On-the-Job Training, Establishment Size, and Firm Size: Evidence for Economies of Scale in the Production of Human Capital," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 82-100, July.
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    More about this item


    Economic models; Labour markets; Productivity;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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