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Specialization Matters in the Firm Size-Wage Gap

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  • 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
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    File URL: http://cep.lse.ac.uk/pubs/download/dp1545.pdf
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    References listed on IDEAS

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    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. 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.

    More about this item

    Keywords

    firm size-wage gap; specialization; division of labor;

    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

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