Firm Size-Wage Premiums: Using Employer Data to Unravel the Mystery

Research on establishment size-wage effects has consistently shown a positive relationship between the number of employees and workers' wages. While several theories have been offered to explain these outcomes, the use of data with limited employer characteristics make for a dubious connection between theory and results. This study examines the firm size-wage effect using a dataset that captures typical worker demographics, but also contains employer information not typically captured in larger datasets. The results provide strong evidence that these wage effects are the result of several forces, including worker sorting/matching, efficiency wages, internal labor markets, and, to a lesser degree, working conditions.