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The Role of Firm Dynamics in Wage Determination

The bulk of the literature on wage determination is aimed at identifying the relative contribution of various determinants of variation in wages across workers. Most attention has focused on the role of individual-specific heterogeneity. Wages have also been found to vary with firm-specific characteristics, although less research has been conducted on this component of wage determination.

This paper uses a rich new data source to explore dimensions of the firm-specific effects on wages that have not been fully investigated before. Specifically, a matched worker and firm panel data set is constructed that tracks the wage experience of individual workers over multiple years, along with worker, industry, and labor market characteristics, as well as measures of firm level employment dynamics. In the empirical literature, the predominant firm-specific effect on wages is firm size; large firms tend to pay a premium over smaller firms.

But changes in firm performance over time, as measured by firm-level employment changes, can also systematically affect individual wages, even after controlling for firm size, firm wage, and observed and unobserved variation in worker characteristics. Moreover, worker earnings can vary with stages of a firm's life cycle. In particular, new businesses are likely to have pay policies that differ significantly from businesses that are in the process of shutting down.

The remainder of the paper is organized as follows. The next section briefly outlines the theoretical arguments for the worker, firm, and other factors in explaining per worker earnings variation. The third section describes the data set and sample characteristics, and presents the results of the wage regressions. The final section summarizes the results and describes limitations of the current analysis as well as potential avenues for further research.

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The Role of Firm Dynamics in Wage Determination