Volume 24, Number 2 (Spring) 1989
Evans, David S. and Linda S. Leighton. 1989. "Why Do Smaller Firms Pay Less?" Journal of Human Resources 24(2):299-318.
This paper uses data from the National Longitudinal Survey of Young Men and the Current Population Survey for 1983 to examine the relationships among wages, firm size, and plant size. We reach three key findings. First, plant size has little independent effect on wages once we have controlled for firm size for firms with fewer then 1,000 employees. Second, we find evidence of sorting on observed and unobserved ability characteristics across firm sizes. Better educated and more stable workers are in larger firms. Third, results from a first-difference estimator indicate that about 60 percent of the wage-size effect is due to unobserved heterogeneity when all firms are considered and about 100 percent when firms with 25 or more employees are considered.
The authors are professors of economics at Fordham University. They would like to thank, without implicating, Charles Brown and an anonymous referee for many valuable comments and suggestions. The data used in this paper and an appendix containing supplemental tables are available on 1.2MB floppy diskettes for a nominal fee for one year from the publication date of this paper.
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