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Why do large firms pay higher wages? Evidence from matched worker‐firm data

Thierry Lallemand (Department of Applied Economics (DULBEA) and Centre de Comptabilité, Université Libre de Bruxelles, Brussels, Belgium)
Robert Plasman (Department of Applied Economics (DULBEA), Université Libre de Bruxelles, Brussels, Belgium)
François Rycx (Department of Applied Economics (DULBEA) and Institute for the Study of Labor (IZA), Université Libre de Bruxelles, Brussels, Belgium)

International Journal of Manpower

ISSN: 0143-7720

Article publication date: 1 October 2005

Abstract

Purpose

This paper analyses the magnitude and sources of the firm‐size wage premium in the Belgian private sector.

Design/methodology/approach

Using a unique matched employer‐employee data set, our empirical strategy is based on the estimation of a standard Mincer wage equation. We regress individual gross hourly wages (including bonuses) on the log of firm‐size and insert step by step control variables in order to test the validity of various theoretical explanations.

Findings

Results show the existence of a significant and positive firm‐size wage premium, even when controlling for many individual characteristics and working conditions. A substantial part of this wage premium derives from the sectoral affiliation of the firms. It is also partly due to the higher productivity and stability of the workforce in large firms. Yet, findings do not support the hypothesis that large firms match high skilled workers together. Finally, results indicate that the elasticity between wages and firm‐size is significantly larger for white‐collar workers and comparable in the manufacturing and the service sectors.

Research limitation/implications

Unfortunately, we are not able to control for the potential non‐random sorting process of workers across firms of different sizes.

Originality/value

This paper is one of the few to test the empirical validity of recent hypotheses (e.g. productivity, job stability and matching of high skilled workers). It is also the first to analyse the firm‐size wage premium in the Belgian private sector.

Keywords

Citation

Lallemand, T., Plasman, R. and Rycx, F. (2005), "Why do large firms pay higher wages? Evidence from matched worker‐firm data", International Journal of Manpower, Vol. 26 No. 7/8, pp. 705-723. https://doi.org/10.1108/01437720510628149

Publisher

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Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited