Skill Supply, Firm Size, and Economic Development

Large firms are more productive than small firms, yet in low-income countries they employ only a small share of workers. Using newly harmonized microdata that link workers’ education and wages to the size of their employer for 57 countries, we document four facts: Countries with lower skill endowments have 1) less employment in large firms and 2) a greater skill premium, and 3) large firms are more skill-intensive than small firms across countries, 4) with a gap that is larger in low-income countries. A model in which heterogeneous firms choose between a skill-intensive modern technology and a traditional one matches these patterns. In a quantitative analysis of the model, skill endowments account for 88% of the cross-country variation in large-firm employment, and technology choice adds a third to a country’s output gain from a larger skill endowment. Small firms in low-income countries are thus largely an efficient response to skill scarcity, and adjustments in the size structure of firms are an important vector of output gains from skill increasing skill supply.