Firm size, wages, and the business cycle

The persistence of a wage differential between small and large firms has been well documented.    The source of this differential can be attributed various factors including differences in employees’ endowments between large and small firms and the firms’ differing responses to these endowments.  Each of these factors tend to reduce the differential.  Never the less, a large portion of the observe differences remains unexplained (see Hettler, P. (2007). The Decomposition of Firm Size Wage Differentials” Journal of Labor Research 28(3): 477-486).   Recently, several researchers have also documented a systematic difference in employment and job creation between small and large firms related to the business cycle, specifically noting that large firms shed more jobs during economic downturns (see Moscarini, G., & Postel-Vinay, F. (2012). The contribution of large and small employers to job creation in times of high and low unemployment. The American Economic Review, 102(6), 2509-2539 who report that the differential growth rate in employment between initially large and small firms has a correlation of -0.5 with the unemployment rate).

Putting these two observations together yields a rather dismal outcome regarding wages over the course of an economic downturn (as a relatively larger portion of employment may lie in smaller firms paying lower wages).  This paper explores this relationship empirically for the United States over the course of the ‘Great Recession,’ specifically searching for the source of the firm size-related differences in employment and wages using a Oaxaca decomposition technique.  Initial results indicate that during the economic downturn a larger proportion of the difference in both wages and employment changes can be explained by employee endowments and industrial classification, respectively.