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Abstract:

cover
CEP Discussion Paper
Specialization Matters in the Firm Size-Wage Gap
Maria Molina-Domene
May 2018
Paper No' CEPDP1545:
Full Paper (pdf)

JEL Classification: J31; L23


Tags: firm size-wage gap; specialization; division of labor

This study applies the O-ring theory to explain the firm-size wage premium. It focuses on the joint role of the division of labor and employee characteristics. Including the firm heterogeneity of occupations in a standard wage regression with individual fixed effect shrinks the size coefficient by a third. Labor productivity follows a similar pattern as wages. The intuition is that individuals who work for large firms focus on a limited number of tasks become more efficient and productive, and earn higher wages. Additional predictions originating from the labor specialization hypothesis receive support from the data.