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Title: The Effect of Firm Size on Wage Rates
Resulting in 1 citation.
1. Garen, John Edward
The Effect of Firm Size on Wage Rates
Ph.D. Dissertation, The Ohio State University, 1982. DAI-A 43/01, p. 229, Jul 1982.
Also: http://rave.ohiolink.edu/etdc/view?acc_num=osu1269533065
Cohort(s): Young Men
Publisher: UMI - University Microfilms, Bell and Howell Information and Learning
Keyword(s): Control; Firm Size; I.Q.; Industrial Classification; Modeling; Skilled Workers; Wage Rates

A substantial amount of empirical work in the economics literature has verified the correlation between firm size and wage rates is positive and significant, even after controlling for standard measures of worker quality. However, little theoretical work has been done to explain this regularity. In addition, the empirical analysis presented here rejects a number of simple explanations for the firm size effect on wages, including the union threat model. A model of wage rate determination is developed which yields implications about wage structure in large and small firms. The model focuses on the desire of firms to evaluate the abilities of their workers. It is assumed that self-selection devices do not sort workers perfectly, thus a substantial variation in ability remains for a given set of observable characteristics. The firm can insure the retention of its highest ability workers, as well as those of lower ability, by paying everyone the opportunity wage of the most able. Alternatively, it can save on its wage bill by attempting to evaluate workers' abilities and paying each his opportunity wage. It is shown that the wage required to maintain the quality of the firm's labor force is smaller, the more accurate the firm's evaluation is. Due to hierarchical 'loss of control,' large firms encounter higher costs of evaluating workers, thus rely more on paying wage premiums. The model is consistent with the observed correlation between firm size and wages, but it also is supported by other evidence. It is shown that larger firms' less accurate evaluations lead to a smaller return to measured ability for workers in large firms. Results using the National Longitudinal Survey of Young Men indicate this is the case, where IQ is used as a measure of ability. Furthermore, wage dispersion should be smaller among workers in large firms because large firms, having inaccurate evaluations, cannot differentiate well among workers. Again, the data support this. The model is a lso consistent with findings regarding the educational attainment and productivity of workers in large firms. Thus, the model is well supported by the data.
Bibliography Citation
Garen, John Edward. The Effect of Firm Size on Wage Rates. Ph.D. Dissertation, The Ohio State University, 1982. DAI-A 43/01, p. 229, Jul 1982..