Firm-Size, Wages, and the Role of Knowledge
The focus of this research addresses the behavior of the firm-size wage differential in a dynamic context, by juxtaposing the wage paths generated by cohorts of new firms in different sectors to those of their larger incumbent counterparts. But first, one must ask why this issue is important, beyond contributing a new perspective to the existing literature? The answer to this research question is important from a policy perspective as noted by many other researchers (McPherson 1996; Baldwin 1998; Hamermesh 1997; Audretsch et al. 2001; Brown et al. 1989). That is, envision a development bank or government wanting to establish programs that foster industrial growth. What types of firms should receive funding or lending in such a circumstance? If a developmental agency or government seeks to maximize the return of the marginal dollar lent or spent by the government, where should this dollar be allocated if the decision is between encouraging the formation of new firms or funding existing, established larger firms? In the early 1980s (1981) argued that new and small firms create the majority of jobs in the United States while (1990) asserted that these jobs created by small firms are generally short lived and low paying. For instance, (1990) concede that small firms do create the majority of jobs in a given period and employ 70% of the labor force, but the jobs created by small firms are lower paying and more frequently short-lived. The authors then point out that reports in the later 1980s exaggerate the decline of job security in larger firms because firms, in general, are larger in the manufacturing sector, and layoffs in this sector are usually of greater magnitude. Consequently, they garner more public attention, while we ignore the job loss of the small struggling firm that eventually fails. In fact, as the authors conclude, larger firms are still the source of more stable secure jobs. Thus, in light of these results, and the literature’s well-established finding of premiums in large firm pay, the answer for industrial planners lies in encouraging the development of large firms.17
KeywordsFirm Size Small Firm Large Firm Relative Growth Rate Real Wage
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- 17.Such considerations, for example, may have played a role in the policy of planners who solicited the then Daimler-Benz (now of course, Daimler-Chrysler) automaker to locate one of its plants in Alabama in the mid-1990s.Google Scholar
- 18.This is actually quite an issue in many developing countries. For example, countries such as Mexico have witnessed the growth of many firms in the Northern part of the country, which are part of industry that imports intermediate products, uses them in production, and exports them back out of the country. These firms, the Maquila industry, have flourished under NAFTA in recent years, but Mexican officials have expressed concerns of becoming solely a ‘Maquila Country’ or a country characterized by large industrial firms which provide stable employment and wages, but on the other hand, do not create or participate in the creation of new knowledge and innovation. This might be an example of a case where large firms provide stable employment and wages but have minimal prospects of growth associated with young knowledge firms.Google Scholar