Why do Smaller Firms Pay Less?
This paper uses data from the National Longitudinal Survey of Young Men and the Current Population Survey for 1983 to examine the relationships among wages, firm size, and plant size. We reach three key findings. First, plant size has little independent effect on wages once we have controlled for firm size for firms with fewer than 1,000 employees, Second, we find evidence of sorting on observed and unobserved ability characteristics across firm sizes. Better educated and more stable workers are in larger firms. Third, results from a first-difference estimator indicate that about 60 percent of the wage-size effect is due to unobserved heterogeneity when all firms are considered and about 100 percent when firms with 25 or more employees are considered.
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