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Should Workers Care About Firm Size?

  • Ana Ferrer

    ()

  • Stephanie Lluis

    ()

The question of wage differentials by firm size has been studied for several decades with no commonly accepted explanations for why large firms pay more. In this paper, we reexamine the relationship between firm size and wage outcomes by estimating the returns to unmeasured ability between large and small firms. Our empirical methodology, based on non- linear instrumental variable estimations, allows us to directly estimate the returns to unmeasured ability by firm size and, therefore, to test the two main theories of wage determination proposed to explain the relationship between firm size and wages, namely ability sorting and job screening. We use data from the Survey of Labour and Income Dynamics (SLID), which provides longitudinal information on workers' and firms' characteristics, including establishment and firm size. We find significant differences in the returns to unmeasured ability across firm size. In particular, we find that the returns to unmeasured ability seem to follow a non-linear pattern. The returns to unmeasured ability are significantly higher in medium size (above 500, but below 1000 workers) firms relative to small firms. However, the returns to unmeasured ability are not significantly greater in large firms relative to medium or small firms. Overall, it seems that ability sorting dominates for moves from small to medium size firms in that ability is more productive and, therefore, more rewarded in the latter than the former. On the other hand, when firms become "too large," the monitoring costs hypothesis seems to dominate in that ability is not more rewarded than in smaller firms.

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Paper provided by Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus) in its series Working Papers with number 0204.

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Handle: RePEc:hrr:papers:0204
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  1. Rene Morissette, 1993. "Canadian Jobs and Firm Size: Do Smaller Firms Pay Less?," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 159-74, February.
  2. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  3. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Universite de Montreal, Departement de sciences economiques.
  4. Luojia Hu, 2003. "The hiring decisions and compensation structures of large firms," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(4), pages 663-681, July.
  5. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2002. "Comparative Advantage, Learning, and Sectoral Wage Determination," NBER Working Papers 8889, National Bureau of Economic Research, Inc.
  6. Idson, Todd L & Feaster, Daniel J, 1990. "A Selectivity Model of Employer-Size Wage Differentials," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages 99-122, January.
  7. Stephanie Lluis, . "The Role of Comparative Advantage and Learning in Wage Dynamics and Intra-Firm Mobility: Evidence from Germany," Working Papers 0103, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  8. Garen, John E, 1985. "Worker Heterogeneity, Job Screening, and Firm Size," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 715-39, August.
  9. Kenneth R. Troske, 1998. "Evidence on the Employer Size-Wage Premium From Worker-Establishment Matched Data," Labor and Demography 9807001, EconWPA.
  10. Jonas Agell, 2003. "Why are Small Firms Different? Managers’ Views," CESifo Working Paper Series 1076, CESifo Group Munich.
  11. Lemieux, Thomas, 1998. "Estimating the Effects of Unions on Wage Inequality in a Panel Data Model with Comparative Advantage and Nonrandom Selection," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 261-91, April.
  12. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
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