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Specialization Matters in the Firm Size-Wage Gap

Maria Molina-Domene

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This study applies the O-ring theory to explain the firm-size wage premium. It focuses on the joint role of the division of labor and employee characteristics. Including the firm heterogeneity of occupations in a standard wage regression with individual fixed effect shrinks the size coefficient by a third. Labor productivity follows a similar pattern as wages. The intuition is that individuals who work for large firms focus on a limited number of tasks become more efficient and productive, and earn higher wages. Additional predictions originating from the labor specialization hypothesis receive support from the data.

Keywords: firm size-wage gap; specialization; division of labor (search for similar items in EconPapers)
JEL-codes: J31 L23 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-bec and nep-lma
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