Does Firm Size Matter Anymore? The New Economy and Firm Size Wage Effects

Researchers have long known that large firms pay higher wages than small firms for workers with similar measured characteristics; however, an agreed-upon explanation for this firm size wage effect (FSWE) has not been reached. Recent changes in the economy provide new leverage for testing competing theories for the effect, while questions about the existence and nature of the “New Economy” provide new motivation for exploring this topic. This study uses the 1988-2003 Current Population Survey and finds that the FSWE has declined by about one third over the study period. Examining the competing explanations for the FSWE, this study finds that while the sorting of workers by traits, unions, and industry factors all contribute to some portion of the effect in cross-section, they fail to explain why it has declined over time. Market power explanations also fail to find support. Shifts in organizational structures, particularly a decline of internal labor markets, appear to best fit the results. These findings provide supporting evidence for the “New Economy” and the idea that recent decades have brought about significant changes within organizations and in employment opportunities.

[1]  C. Udry,et al.  The Dual Economy , 1999 .

[2]  Marshall W. Meyer.  Environments and organizations , 1978 .

[3]  James L. Medoff,et al.  The Employer Size-Wage Effect , 1989, Journal of Political Economy.

[4]  Chiara Criscuolo.  Employer Size - Wage Effect: A Critical Review and an Econometric Analysis , 2000 .

[5]  Mark E. Van Buren,et al.  Is bigger better? Explaining the relationship between organization size and job rewards , 1996 .

[6]  Peter K. Schott,et al.  U.S. Imports, Exports, and Tariff Data, 1989-2001 , 2002 .

[7]  James N. Baron.  ORGANIZATIONAL PERSPECTIVES ON STRATIFICATION , 1984 .

[8]  D. Neumark.  On the Job: Is Long-Term Employment a Thing of the Past? , 2002 .

[9]  Meichu D. Chen,et al.  Further Evidence on Returns to Schooling by Establishment Size , 1991 .

[10]  J. Haltiwanger,et al.  Wage Dispersion between and within U.S. Manufacturing Plants, 1963-1986 , 1991 .

[11]  Ezra W. Zuckerman,et al.  Focusing the Corporate Product: Securities Analysts and De-diversification , 2000 .

[12]  Francisco Gabriel Heidemann.  Executive defense: shareholder power and corporate reorganization , 1997 .

[13]  James N. Baron,et al.  The Structure of Opportunity: How Promotion Ladders Vary within and among Organizations. , 1986 .

[14]  S. Crowther,et al.  The New Deal at Work – Managing the Market Driven Workforce , 2000 .

[15]  Frederic L. Pryor.  New Trends in U.S. Industrial Concentration , 2001 .

[16]  Art Budros,et al.  The New Capitalism and Organizational Rationality: The Adoption of Downsizing Programs, 1979–1994 , 1997 .

[17]  Walter Y. Oi,et al.  Firm size and wages , 1999 .

[18]  Walter Y. Oi,et al.  Workers Are More Productive in Large Firms , 1999 .

[19]  A. Kalleberg,et al.  Economic Segmentation, Worker Power, and Income Inequality , 1981, American Journal of Sociology.

[20]  P. Cappelli.  Career Jobs are Dead , 1999 .

[21]  W. Oi,et al.  Chapter 33 Firm size and wages , 1999 .

[22]  Gerald F. Davis,et al.  The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form , 1994 .

[23]  James N. Baron,et al.  THE ORGANIZATION OF WORK IN A SEGMENTED ECONOMY , 1984 .

[24]  Robert E. Hall,et al.  Industry Rents: Evidence and Implications , 1989 .

[25]  K. C. O'shaughnessy,et al.  The New Deal at Work: Managing the Market-Driven Workforce , 1999 .

[26]  Size, Skill and Sorting , 2004 .

[27]  Kenneth R. Troske.  Evidence on the Employer Size-Wage Premium from Worker-Establishment Matched Data , 1999, Review of Economics and Statistics.

[28]  James T. Hamilton,et al.  Employers Large and Small , 1990 .

[29]  J. Jacobs,et al.  Organizational, job, and individual determinants of workplace training : Evidence from the National Organizations Survey , 1996 .

[30]  Mark Granovetter,et al.  SMALL IS BOUNTIFUL: LABOR MARKETS AND ESTABLISHMENT SIZE* , 1984 .

[31]  W. Bridges,et al.  When Bigger is Better: Differences in the Individual-Level Effect of Firm and Establishment Size , 1988 .

[32]  David S. Evans,et al.  Why Do Smaller Firms Pay Less , 1989 .

[33]  Kenneth R. Troske,et al.  Examining the Employer-Size Wage Premium in the Manufacturing, Retail Trade, and Service Industries Using Employer-Employee Matched Data , 1999 .

[34]  David Knoke,et al.  Organizations in America : analyzing their structures and human resource practices , 1997 .

[35]  Wesley S Mellow,et al.  Employer Size and Wages , 1982 .

[36]  R. Stolzenberg,et al.  Bringing the Boss Back In: Employer Size, Employee Schooling, and Socioeconomic Achievement , 1978 .

[37]  Neil Fligstein.  The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies , 2001 .