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Product Market and the Size-Wage Differential

Author

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  • Shouyong Shi

    (Queen's University)

Abstract

This paper constructs a model to show that plants differing in size pay different wages to homogeneous workers. A large plant can use its large capacity to satisify buyers in the product market more readily and so can charge a higher price than a small plant can. As a result, a large plant has a higher sales revenue per worker. To capture this large revenue, large plants post high wages to recruit. The size-wage differential is shown to survive the labor market competition and entry by new plants. Entry and recruiting generate a stationary distribution of plants in the industry that interacts with the size-wage differential. With numerical examples it is shown that an increase in the demand for the industry's product reduces the size-revenue differential and shifts the size distribution in the industry towards small plants. The overall effect is such that the size-wage differential increases when the product demand is initially low and falls when the product demand is already high.

Suggested Citation

  • Shouyong Shi, 1998. "Product Market and the Size-Wage Differential," Working Papers 972, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:972
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    Cited by:

    1. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    2. Josef Falkinger & Volker Grossmann, 2003. "Workplaces in the Primary Economy and Wage Pressure in the Secondary Labor Market," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 523-523, September.
    3. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
    4. Shouyong Shi, 2000. "The Research Agenda: Search Theory beyond the Matching Function," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April.
    5. Feng, Shuaizhang, 2009. "Return to Training and Establishment Size: A Reexamination of the Size-Wage Puzzle," IZA Discussion Papers 4143, Institute for the Study of Labor (IZA).
    6. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Documents de travail du Centre d'Economie de la Sorbonne 16002, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. John Kennes, 2004. "Competitive Auctions: Theory and Application," Discussion Papers 04-16, University of Copenhagen. Department of Economics.
    8. Li, Fei & Tian, Can, 2011. "Directed search and job rotation," MPRA Paper 33875, University Library of Munich, Germany.
    9. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, May.
    10. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01277548, HAL.
    11. Watanabe, Makoto, 2010. "A model of merchants," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1865-1889, September.
    12. BI, Sheng & LI, Yuanyuan, 2015. "Holdup and hiring discrimination with search friction," MPRA Paper 65100, University Library of Munich, Germany.
    13. Klaus Kultti & Eeva Mauring, 2014. "Low price signals high capacity," Journal of Economics, Springer, vol. 112(2), pages 165-181, June.
    14. Lester, Benjamin, 2010. "Directed search with multi-vacancy firms," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2108-2132, November.
    15. Watanabe Watanabe, Makoto, 2006. "Middlemen: the visible market makers," UC3M Working papers. Economics we061002, Universidad Carlos III de Madrid. Departamento de Economía.

    More about this item

    Keywords

    Size-Wage Differentail; Price/Wage Posting; Size Distribution of Plants;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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