Firm-size wage differentials in the Netherlands

Published in: Small Business Economics 7 (1995). 173-182. (with Mirjam van Praag)

An unsolved problem in modern labor economics is the positive relation between the size of the firm in which a worker is employed and his wage. One line of research that has been developed quite recently in this field is the application of endogenous switching regression models. In this paper we utilize such a model to investigate firm-size wage differentials in the Netherlands. The principal findings are that larger firms pay higher returns on schooling whereas smaller firms tend to reward IQ. Combined with the finding that high IQ-workers are sorted into the largest firms, the results are consistent with a model of job screening. Furthermore, we find that employed sons of self-employed fathers are more likely to work in small firms and that wage prospects for all types of workers are indeed most favorable in larger firms.

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