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BOK Working Paper No.2018-33, The Sources of Firm Size-Wage Premium: Evidence from Employer-Employee Matched Data

Economic Research Institute (82-2-759-5441) 2018.10.28 3039

Title : The Sources of Firm Size-Wage Premium: Evidence from Employer-Employee Matched Data

Author : Sang Yoon Song(BOK)


Using the Korean employer-employee matched data over the period between 2007-2015, this paper analyzes the effects of characteristics of both employee and employer on firm-size wage premium, focusing on four factors: 1) worker characteristics, 2) worker composition within firms(or establishments), 3) wage differentials between contractors and subcontractors, and 4) performance pay and rent-sharing behaviors of employers. The main results are as follows. First, among the factors considered, the one that shows the biggest effects on size-wage premium is worker characteristics. In particular, the differences in the years of schooling and work experience between workers of small and larger establishments play critical roles in explaining size-wage premium. Secondly, among variables for worker composition, the differences in shares of highly educated workers and workers who join labor unions within establishments mainly account for size-wage premium. Thirdly, wage differentials between contractors and subcontractors also affect size-wage premium in the manufacturing sector. This is due to relatively high shares belonging to subcontractors among small firms and lower wages paid to workers of subcontractors. Fourthly, low performance pay and inactive rent-sharing behaviors of small manufacturing firms make size-wage premium larger. Lastly, size-wage premium affects workers’ wages disproportionately according to wage levels: High-wage workers in large firms benefit more from their size-wage premiums compared to low-wage workers working for the same firms.