Estimating the employer size-wage premium in a panel data model with comparative advantage and non-random selection

Abstract

This paper considers the estimation of the employer-size wage effect using a panel of employer-employee matched data. We test for the possibility of different returns to observable human capital variables as well as examine the role played by unmeasured skills in driving the allocation of workers across firms of different sizes. Our results show that some of the observed skills; namely, education, age, and tenure have high returns in large firms, while the opposite is true for high skilled occupations and for the gender gap. On the other hand, the price of non-observed skills is reduced as firm size increases. This finding is consistent with explanations based on the premise that large employers have more difficulty monitoring workers, which therefore leads them to monitor less closely.