The Role of Unobserved Heterogeneity and On-the-Job Training in the Employer Size-Wage Effect: Evidence from Australia

The positive relationship between employer size and wages is a ubiquitous feature of advanced industrialized economies. The purpose of the present study is to clarify the nature of the employer size-wage effect in Australia by determining the extent to which it can be explained by observed and unobserved quality differences, including difference in on-the-job training. The empirical results are based on analysis of the Household Income and Labour Dynamics in Australia (HILDA) Survey, which is a relatively new nationally representative panel data set focused on family income, employment, and well-being. Our findings indicate that for males, quality adjusted employer size-wage effects are quite small and mostly driven by lower wages for workers in the smallest firms (fewer than twenty workers). For females, size-wage effects disappear when unobserved quality differences are accounted for. We also find that accounting for differences in the incidence of job training has no effect on the structure of wage differences by employer size.