Firm Size, Workforce Composition and Wage Inequality

Joint project with Chen Lin, Benjamin Lochner, and Thomas Schmid

Paper available upon request


Using a matched employee-establishment-firm data set covering German workers, we find that wage inequality increases monotonously with firm size: the largest firm decile pays 70% higher wages than the bottom decile, and their within-firm wage variance is 30% larger. Decomposing wage inequality into workforce composition and non-composition effects reveal that composition is responsible for three-quarters of the size-inequality relation within firms and half between firms. Higher wage variance in larger firms is largely explainable by more heterogeneous job characteristics and higher employee monitoring complexity. Higher wages in larger firms are not related to differences in profitability, monitoring complexity, or unionization levels, but different job characteristics and local labor markets play some role. Analyzing establishment size within firms reveals that larger establishments show more variation in workforce quality, but do not pay an economically significant wage premium.