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Employer size–wage effects: evidence from matched employer–employee survey data in the UK

This paper employs a random sample of matched employer–employee data from the UK to test seven possible explanations for the positive relationship between employer size and pay. Individual wage equations show a large employer size–wage premium. We then control for a range of establishment-level variables, based on seven hypotheses typically advanced to explain this premium. Each establishment-level factor reduces the wage premium, but a sizeable premium nonetheless remains. In adjudicating on these hypotheses, we find a strong association between the internal labour market and the employer size–wage premium. This finding supports the theory that the employer size–wage effect may be due to the higher costs of turnover or monitoring in larger firms. However, we find contrasting effects for public versus private sector establishments.