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Home Publications Blogs CEPR Blog Small Businesses May Not Pay

Small Businesses May Not Pay

Written by Will Kimball   
Wednesday, 12 June 2013 13:24

A lot of academic research supports the finding that, on average, small businesses pay lower wages to their employees than larger businesses. This “size-wage premium” was recognized as early as 1911 by Henry Moore, who focused on the benefits and conditions of Italian working women working in textile mills (as cited by Oi and Idson, 1999, p. 2172). Since then, researchers have expanded the studies to account for employee characteristics and job conditions at a large variety of industries and locations. Every major study has confirmed that, on average, larger employers offer their employees higher wages.

Economists have suggested several explanations for this phenomenon, though many of the hypotheses have been difficult to test empirically. Some assume that larger employers, who are more likely to be more profitable, simply have more of an ability to pay their workers better wages (also known as rent-sharing). Others have proposed that larger firms may offer a "compensating differential" to make up for poorer working conditions at the larger firms, but the evidence suggests that working conditions and benefits are also better at larger establishments. A more promising explanation argues that workers with different productivity levels get “sorted” into establishments of different sizes. 

Evans and Leighton (1989), for example, found that more “stable” workers (married, low frequency of past terminations) were more likely to be in larger businesses, which are typically less likely to fail than smaller ones. Todd Idson (1993) found that this sorting improved the “internal job markets” of larger employers, allowing employees to develop their skills and increase their productivity. Though not conclusive, research performed to date suggests that greater job tenure and wider array of opportunities offered by larger employers are also associated with greater productivity and compensation than smaller counterparts.

Tags: employers | jobs | labor market | small businesses

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