Employer Size or Skill Group Size Effect on Wages?

The authors analyze explanations for firm- or establishment-size effects on wages. One theory is that each firm faces an upward sloping supply curve for labor, implying that the number of any particular type of worker should matter for his or her level of pay, rather than the total number of workers in the firm. To test this hypothesis, the authors add the log of skill group size to the standard log wage equation. Results indicate that the traditional employer-size effect on wages dwindles away once control for the number of workers of the same skill group (educational type) as the observed individual within the establishment is added to the equation. The skill group size effect on wages is substantial. After controlling for both individual- and establishment-specific heterogeneity, a dwindling employer-size effect and a significant group size effect remain.