Worker Heterogeneity, Job Screening, and Firm Size

A model of job screening is developed in which firms make wage offers to workers based on an imperfect evaluation of their abilities. If large firms have higher costs of acquiring information about workers, they screen workers with less accuracy and choose a wage compensation scheme different from the one small firms choose. This generates the often observed positive correlation between firm size and wages. The model also predicts that wage structure, and perhaps wage dispersion, will differ by firm size and that individuals who acquire more schooling will also choose to work in a larger firm. These hypotheses are tested and supported using data from the National Longitudinal Survey.

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