Job search skills, employer size and wages

Abstract

Many theories concerning the underlying cause of the observed positive correlation between employer size and wages have been evaluated empirically, with a sizeable residual remaining unexplained. This study presents and tests a new theory: successful applicants for vacancies in larger employers possess greater job search skills and therefore are able to obtain a wage closer to their maximum potential wage. Empirical results confirm that differential job search abilities can account for approximately 20% of the difference in average observed wages across large and small employers.

Acknowledgements

The author wishes to thank Kathy Hayes and Daniel Slottje for helpful discussions. All errors are my own.

Notes

The structure of the model closely follows Daneshvary et al. (1992).

An implicit assumption is that the idiosyncratic shocks, v, are uncorrelated with firm/establishment size.

Assuming the righthand side variables in Equation 1 enter linearly,

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See Freeman and Rogers (1998) for further details.

To circumvent the problem of extreme values after converting the data into average weekly earnings, observations with wages in the bottom (top) five percentiles are recoded with the value at the fifth (95th) percentile.

In particular, wages are increasing in education, concave in age and tenure, lower for black workers, and higher for workers in management, urban areas, and when a union exists. In addition, married men earn more than single men, consonant with the so-called marriage premium, and men with children earn more than childless men.

This finding is consistent with the conclusion in Bayard and Troske (1999) that labour productivity explains much of firm size premium, but not the establishment size premium.