Why do large firms pay higher wages? Evidence from matched worker‐firm data

Purpose – This paper analyses the magnitude and sources of the firm‐size wage premium in the Belgian private sector. Design/methodology/approach – Using a unique matched employer‐employee data set, our empirical strategy is based on the estimation of a standard Mincer wage equation. We regress individual gross hourly wages (including bonuses) on the log of firm‐size and insert step by step control variables in order to test the validity of various theoretical explanations. Findings – Results show the existence of a significant and positive firm‐size wage premium, even when controlling for many individual characteristics and working conditions. A substantial part of this wage premium derives from the sectoral affiliation of the firms. It is also partly due to the higher productivity and stability of the workforce in large firms. Yet, findings do not support the hypothesis that large firms match high skilled workers together. Finally, results indicate that the elasticity between wages and firm‐size is significantly larger for white‐collar workers and comparable in the manufacturing and the service sectors. Research limitation/implications – Unfortunately, we are not able to control for the potential non‐random sorting process of workers across firms of different sizes. Originality/value – This paper is one of the few to test the empirical validity of recent hypotheses (e.g. productivity, job stability and matching of high skilled workers). It is also the first to analyse the firm‐size wage premium in the Belgian private sector.