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Bigger Businesses Pay Higher Wages

Posted By Jason Richwine On April 15, 2010 @ 2:00 pm In Economics | Comments Disabled

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Looking for a raise during these tough economic times? You may want to try working for a larger company. Though largely unpublicized, the fact that wages rise with firm size is a well established result in labor economics. We might call this the “Big Business wage premium,” which exists even when we compare workers with the same observable skills and experience.

Imagine that you work at a tiny business that employs fewer than 10 people. Now imagine a veritable clone of yourself—someone of the same race, gender, and marital status as you, working in the same occupation, living in the same area, and having the same education and experience. If your clone works at a business that employs between 10 and 24 people, then the clone likely makes $1.03 for every dollar that you earn. As we place your clone in larger and larger companies, the premium continues to grow. Businesses with over 1000 workers will pay your clone $1.16 for each dollar of your salary.

The table below summarizes the impact of the Big Business wage premium. The second column takes a person making $50,000 annually at a small business and shows how the salary would rise if he moved to a bigger company. The third column shows the corresponding percentage gain in salary. A person who makes $50,000 at a small company has a counterpart with the same skill profile making $58,090 at a large company, an increase of 16.2 percent.

Why do bigger businesses pay more? Economists have advanced several theories, but no single answer exists. Perhaps workers tend to dislike the anonymity or lack of control at a large company, and they demand higher wages to work there as a consequence. Or maybe working at a small company is like an investment, with workers promised higher salaries as soon as the business takes off. It’s also possible that workers have more bargaining power when their potential employer needs to hire a large number of people.

Whatever its cause, the existence of a Big Business wage premium is somewhat ironic. In today’s political climate, Big Business is often depicted as cold and uncaring—even villainous—while small businesses enjoy popularity as pillars of social responsibility. The fact that people can earn higher wages at Walmart compared to a local mom-and-pop store is not at all consistent with this view. When politicians support tax breaks and other perks for small businesses, they may think they are taking the side of “the little guy,” but they are implicitly favoring lower wages for workers.

Of course, the real test of a company’s worth in a capitalist system is not how much it pays its employees, but whether it satisfies its customers. Firms should be free to set wages and prices as they see fit, and neither small nor large businesses should be favored by government policy. But perhaps knowing about the Big Business wage premium will give small business boosters, eager to dispense government largesse, some pause in the future.


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