The Role of Expectation on Job Search and the Firm Size Effect on Wages

We formulate dynamic games which give a rationale to the firm size–wage effect that the sheer firm size increases wages. We postulate that past wages of large firms are known to new employees, while those of small firms are not. Large firms can credibly induce workers to expect high future wages and reduce turnover, while small firms have no choice but to be myopic and pay low wages. The equilibrium wage differential obtains under the same worker characteristics and production function. We provide empirical evidence that workers' expectations depend on firm size and affect wages as predicted by our model.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Financial Markets and Wages

We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange for higher future wages once they become unconstrained. Because constrained firms grow faster, the model predicts a positive correlation between the growth of wages and the growth of the firm. Under some conditions, the model also generates a positive relation between firm size and wages. Using matched employer–employee data from Finland and the National Longitudinal Survey of Youth for the U.S., we show that the key dynamic properties of the model are supported by the data.     

Imperfect competition in two-sided matching markets

This paper considers a simple equilibrium model of an imperfectly competitive two-sided matching market. Firms and workers may have heterogeneous preferences over matches on the other side, and the model allows for both uniform and personalized wages or contracts. To make the model tractable, I use the Azevedo and Leshno (2013) framework, in which a finite number of firms is matched to a continuum of workers.In equilibrium, even if wages are exogenous and fixed, firms have incentives to strategically reduce their capacity, to increase the quality of their worker pool. The intensity of incentives to reduce capacity is given by a simple formula, analogous to the classic Cournot model, but depends on different moments of the distribution of preferences. I compare markets with uniform and personalized wages. For fixed quantities, markets with personalized wages always yield higher efficiency than markets with uniform wages, but may be less efficient if firms reduce capacity to avoid bidding too much for star workers.     

Equilibrium Wage Dispersion,Firm Size,and Growth

This paper analyzes a model of equilibrium wage dynamics and wage dispersion across firms. It considers a labor market where firms set wages and workers use on-the-job search to look for better paid work. It analyzes a perfect equilibrium where each firm can change its wage paid at any time, and workers use optimal quit strategies. Firms trade off higher wages against a lower quit rate, and large firms (those with more employees) always pay higher wages than small firms. Non-steady-state dispersed price equilibria are also analyzed, which describe how wages vary as each firm and the industry as a whole grow over time. Journal of Economic Literature Classification Numbers: D43, J41.     

Firm size,employment risk and wages: further insights on a persistent puzzle

Recent inquiries into the observed positive relationship between wages and firm size suggest that unobservable characteristics give rise to a sorting of workers into large and small firms. Specifically, smaller firms tend to offer more unstable employment prospects and will tend to attract workers who are themselves unstable. As demonstrated by empirical analysis, the risk of permanent employment separation (i.e. the risk of firm failure) is in fact negatively correlated with firm size. Moreover, when this measure of employment risk is included as a determinant of wages, the independent influence of firm size on wages vanishes. These results suggest that firm size merely proxies for the risk of firm failure by capturing unobservable sources of heterogeneity in workers and firms.     

DIRECTED SEARCH AND FIRM SIZE*

Standard directed search models predict that larger firms pay lower wages than smaller firms, contrary to the data. This article proposes one way to obtain this positive size–wage differential in a directed search setting. I posit that there is an optimal size associated with a firm: A firm suffers a penalty by not operating at its optimal size. I show that if this penalty is sufficiently large the size–wage differential will be obtained. My model also gives a new way to look at the data because it highlights the importance of the distinction between intended and realized firm sizes.     

Sorting by search intensity

In this paper, I characterize matching in an on-the-job search model with endogenous search intensity, heterogeneous workers and firms, and match surplus is shared between workers and firms through bargaining. I provide proof of existence and uniqueness of steady state equilibrium. Given equally efficient matched and unmatched search, the worker skill conditional distribution of firm productivity over matches is stochastically increasing (decreasing) in worker skill if the production function is supermodular (submodular). I also show that this strong notion of sorting does not obtain everywhere for the firm productivity conditional match distribution.     

The spatial sorting and matching of skills and firms

Abstract .  In this paper we make use of a matched employer-employee database for Italy to look at the spatial distribution of wages. Using this rich database we aim to open up the black box of agglomeration economies exploiting the micro dimension of interaction among economic agents, both individuals and firms. We provide evidence that firm size and, especially, skills are sorted across space and account for a large portion of the spatial wage variation. Our data also support the assortative matching hypothesis, which we show not to be driven by co-location of good workers and firms. Finally, we point out that assortative matching is negatively related to local market size.     

Is Corporate Social Responsibility Associated with Lower Wages?

Firms with a reputation as socially responsible may have an important cost advantage: If workers prefer their employer to be socially responsible, equilibrium wages may be lower in such firms. We explore this hypothesis, combining Norwegian register data with data on firm reputation collected by an employer branding firm. Adjusting for a large set of background variables, we find that the firm’s social responsibility reputation is significantly associated with lower wages.     

Intermediate good sourcing,wages and inequality: From theory to evidence

This paper examines the consequences of offshoring and outsourcing on domestic wages and wage inequality. I highlight the role of labor market frictions in impacting firms’ outsourcing and offshoring decisions; specifically, how differential costs of matching with workers affect the location of production (onshore or offshore) and how differential costs of assessing worker quality affect the ownership of intermediate production (intra‐firm or inter‐firm). I demonstrate how firm sourcing decisions can depend crucially on the industry skill intensity, which reflects the importance of worker–firm match quality, and as a result, the effect of offshoring on domestic labor depends on occupation and industry characteristics, as well as the ownership regime of trade. Bringing the theory to the data I rely on plausibly exogenous variation in the cost of inter‐ and intra‐firm offshoring to identify the effects of a change in each type of offshoring on domestic wages. I find strong evidence that the effect of offshoring on domestic wages—both on the average and on the wage distribution—is governed by the type of offshoring (inter‐ vs. intra‐firm), the skill intensity of the industry, and the offshorability of the occupation.     

Factor market structure and technology choice in the Colombian brick industry

This paper examines the relationship between factor markets and an industry structure such that capital-intensity is correlated with size, and firms of different sizes coexist in the long run. Empirical evidence shows that wages vary positively with firm size after correcting for education, experience, turnover and firm location. Secondary source evidence suggests that capital access differs across entrepreneurs, according to their positions in Colombian society. These assumptions are combined in a model which can generate the industry structure observed. The alternative hypothesis that capital access improves over a firm's lifetime, so that industry structure represents a growth path, is examined and rejected.     

Do Foreign Experts Increase the Productivity of Domestic Firms?

While most countries welcome (and some even subsidize) high‐skilled immigrants, there is very limited evidence of their importance for domestic firms. To guide our empirical analysis, we first set up a simple theoretical model to show how foreign experts can affect the productivity and wages of domestic firms. Using matched worker–firm data from Denmark and a matching difference‐in‐differences approach, we then find that firms that hire foreign experts instead of domestic experts become more productive, in the sense that they pay higher wages to high‐skilled co‐workers.     

Corporate Tournaments, Human Capital Acquisition, and the Firm Size–Wage Relation

This paper provides a possible explanation for the empirically observed size–wage effect and inter-industry wage differences. It develops a model in which incentives for workers to accumulate general human capital are provided by corporate tournaments, where workers with the highest level of general human capital win promotions. Given that the prizes in such tournaments are determined by outside market conditions, the investment and the equilibrium wages depend on firm and industry characteristics. The model implies that workers in bigger firms and in more technology intensive and profitable firms and industries acquire more human capital and receive higher wages and benefits.     

FIRM SIZE AND PRICING POLICY

We relate pricing policy of firms to their size, where firm size is interpreted as the size of the clientele served by the concerned firm. We argue that a firm with a large clientele faces a more severe reputational backlash if it ‘reneges’, i.e., deviates from its earlier price offer. This allows the firm to effectively commit to its offers, leading to a unique equilibrium without delay. Interestingly, this equilibrium corresponds to the equilibrium of the related model that does not allow for reneging possibilities. For smaller firms, however, the reputational effects are much less intense, and consequently the equilibria may involve deviation possibilities. In this case, the equilibria are non‐unique and may involve delays as well.     

TRAINING,TURNOVER, AND SEARCH*

This article explores a model of firm‐specific training in a job search environment with labor turnover. The main substantive finding is a positive association between training and wages (when dispersed). The article then precisely characterizes how both wage dispersion and firm profitability depend on the flow value b≥ 0 of workers' unmatched time. It is shown that: (i) for all high values b, no equilibrium exists; (ii) for intermediate values b, multiple equilibria arise, where firms earn zero profits, and choose from a general wage distribution; (iii) for all lower values b, there is a unique equilibrium, with firms earning positive profits, and choosing from an atomless set of wages.     

Employee share ownership in a unionised duopoly

Profit sharing schemes have been analysed assuming Cournot competition and decentralised wage negotiations, and it has been found that firms share profits in equilibrium. This paper analyses a different remuneration system: employee share ownership. We find that whether firms choose to share ownership or not depends on both the type of competition in the product market and the way in which workers organise to negotiate wages. If wage setting is decentralised, under duopolistic Cournot competition both firms share ownership. If wage setting is centralised, only one firm shares ownership if the degree to which goods are substitutes takes an intermediate value; otherwise, the two firms share ownership. In this case, if the union sets the same wage for all workers neither firm shares ownership. Therefore, centralised wage setting discourages share ownership. Finally, under Bertrand competition neither firm shares ownership regardless of how workers are organised to negotiate wages.     

Skills,Tasks and the Scarcity of Talent in a Global Economy

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.     

EFFICIENCY OF WAGE BARGAINING WITH ON-THE-JOB SEARCH

This article studies efficiency in a general class of search models where both unemployed and employed workers search for better jobs and can meet multiple firms simultaneously. Employers can respond to outside offers and wages are a weighted average of the productivities of the current employer and a credible poaching firm. I derive a condition that balances firms' bargaining power and their meeting externality. This condition ensures efficiency of both worker turnover and firm entry. Finally, the efficiency condition unifies and extends many of the results on the efficiency of equilibrium search models.     

A Directed Search Model of Inequality with Heterogeneous Skills and Skill–Biased Technology

In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill–biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high–tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low–tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between–skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill–biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity.