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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.

Suggested Citation

  • Ana Ferrer & Stephanie Lluis, "undated". "Should Workers Care About Firm Size?," Working Papers 0204, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  • Handle: RePEc:hrr:papers:0204

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    References listed on IDEAS

    1. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-880, June.
    2. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    3. Stephanie Lluis, 2005. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 725-768, October.
    4. Jonas Agell, 2003. "Why are Small Firms Different? Managers’ Views," CESifo Working Paper Series 1076, CESifo Group Munich.
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    8. 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.
    9. 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 261-291, April.
    10. Rene Morissette, 1993. "Canadian Jobs and Firm Size: Do Smaller Firms Pay Less?," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 159-174, February.
    11. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
    12. 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.
    13. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
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    Cited by:

    1. Therry Lallemand & François Rycx, 2006. "Establishment Size and the Dipsersion of Wages: Evidence from european Countries," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 52(4), pages 309-336.
    2. Naci Mocan & Erdal Tekin, 2011. "Obesity, Self-Esteem and Wages," NBER Chapters,in: Economic Aspects of Obesity, pages 349-380 National Bureau of Economic Research, Inc.
    3. Lixin Cai & C. Jeffrey Waddoups, 2009. "The Role of Unobserved Heterogeneity and On-the-Job Training in the Employer Size-Wage Effect: Evidence from Australia," Working Papers 0915, University of Nevada, Las Vegas , Department of Economics.
    4. repec:fep:journl:v:28:y:2017:i:1:p:1-9 is not listed on IDEAS
    5. Stéphanie Lluis & Jean Abraham, 2013. "The Wage–Health Insurance Trade-off and Worker Selection: Evidence From the Medical Expenditure Panel Survey 1997 to 2006," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(2), pages 541-581, April.
    6. Justina A.V. Fischer & Alfonso Sousa-Poza, 2006. "The Institutional Determinants of Early Retirement in Europe," University of St. Gallen Department of Economics working paper series 2006 2006-08, Department of Economics, University of St. Gallen.
    7. Thierry Lallemand & Robert Plasman & François Rycx, 2007. "The establishment-size wage premium: evidence from European countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(5), pages 427-451, December.
    8. Rui Baptista & Francisco Lima & Miguel Preto, 2013. "Entrepreneurial skills and workers’ wages in small firms," Small Business Economics, Springer, vol. 40(2), pages 309-323, February.
    9. Alexander Muravyev, 2007. "Firm Size, Wages and Unobserved Skills: Evidence from Dual Job Holdings in the UK," Discussion Papers of DIW Berlin 681, DIW Berlin, German Institute for Economic Research.
    10. Stephan Kampelmann & François Rycx, 2016. "Wage discrimination against immigrants: measurement with firm-level productivity data," IZA Journal of Migration, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-24, December.
    11. Haroon Bhorat & Morné Oosthuizen & Kezia Lilenstein & François Steenkamp, 2017. "Firm-level determinants of earnings in the formal sector of the South African labour market," WIDER Working Paper Series 025, World Institute for Development Economic Research (UNU-WIDER).
    12. Robertas Zubrickas, 2011. "Managerial accountability for payroll expense and firm-size wage effects," IEW - Working Papers 474, Institute for Empirical Research in Economics - University of Zurich.

    More about this item


    Firm Size; Comparative Advantage; Self-selection; Job Screening; Ability Sorting;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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