SSE/EFI Working Paper Series in Economics and Finance
No 462:
The Firm Size Effect: fact or artifact?
John Ekberg ()
and Mickael Salabasis ()
Abstract: The size-wage effect is well documented in the empirical
literature, and typical attempts of explanation center on the supply side,
using variations of the human capital approach, perhaps combined with
institutional theories. With conclusive evidence of its source yet to
emerge, an alternative approach with interesting prospects attempts to give
the demand side a more active part to play. Interpreting jobs as tasks,
potentially firm-specific and organized in hierarchies, the optimal
position for an individual can be assumed to be a function of ability and
human capital, while the wage for a specific task is primarily decided by
its value for the firm. Then, the role played by human capital changes, its
effect being only indirect on wages, and the issue of how the existence of
task structures, or career ladders, affect wages becomes paramount. Using
data with detailed information about job content and structure, evidence of
a natural positive correlation between size and structure is found.
Combined with the reasonable assumption of a positive correlation between
the position of tasks in the hierarchy and the wage, a size effect may very
well come out positive and significant if we fail to control for it, making
it an artifact of the data rather than an accurate description of the
world.
Keywords: wages; plant size; occupational hierarchies; (follow links to similar papers)
JEL-Codes: J31; J41; J44; (follow links to similar papers)
26 pages, September 19, 2001
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