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Product Market and the Size-Wage Differential

Author

Listed:
  • Shouyong Shi

    (Indiana University, U.S.A. and Center of Research on Economic Fluctuations and Employment (CREFE), Quebec, Canada)

Abstract

Using directed search to model the product market and the labor market, I show that large plants can pay higher wages to homogeneous workers and earn higher expected profit per worker than small plants, although plants are identical except size. A large plant charges a higher price for its product and compensates buyers with a higher service probability. To capture this size- related benefit, large plants try to become larger by recruiting at high wages. This size-wage differential survives labor market competition because a high wage is harder to get than a low wage. Moreover, the size-wage differential increases with the product demand when demand is initially low and falls when demand is already high. Copyright 2002 by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Resarch Association

Suggested Citation

  • Shouyong Shi, 2002. "Product Market and the Size-Wage Differential," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 21-54, February.
    • Handle: RePEc:ier:iecrev:v:43:y:2002:i:1:p:21-54
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    Cited by:

    1. Josef Falkinger & Volker Grossmann, 2003. "Workplaces in the Primary Economy and Wage Pressure in the Secondary Labor Market," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 523-544, September.
    2. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    3. Watanabe Makoto, 2020. "Middlemen: A Directed Search Equilibrium Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-37, June.
    4. John Kennes, 2006. "Competitive Auctions: Theory and Application," Contributions to Economic Analysis, in: Structural Models of Wage and Employment Dynamics, pages 145-168, Emerald Group Publishing Limited.
    5. Shouyong Shi, 2000. "The Research Agenda: Search Theory beyond the Matching Function," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April.
    6. Feng, Shuaizhang, 2009. "Return to Training and Establishment Size: A Reexamination of the Size-Wage Puzzle," IZA Discussion Papers 4143, Institute of Labor Economics (IZA).
    7. Julien, Benoit & Kennes, John & Ritter, Moritz, 2018. "Bidding for teams," Labour Economics, Elsevier, vol. 52(C), pages 68-73.
    8. Makoto Watanabe, 2018. "Middle Men: The Visible Market-Makers," The Japanese Economic Review, Springer, vol. 69(2), pages 156-170, June.
    9. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Documents de travail du Centre d'Economie de la Sorbonne 16002, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    10. Benjamin Lester, 2008. "Endogenous, State-Dependent Matching with Implications for the Cyclical Behavior of Unemployment," 2008 Meeting Papers 299, Society for Economic Dynamics.
    11. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, May.
    12. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01277548, HAL.
    13. Watanabe, Makoto, 2010. "A model of merchants," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1865-1889, September.
    14. Klaus Kultti & Eeva Mauring, 2014. "Low price signals high capacity," Journal of Economics, Springer, vol. 112(2), pages 165-181, June.
    15. Feng, Shuaizhang & Zheng, Bingyong, 2009. "Cherry-Picking in Labor Market with Imperfect Information," IZA Discussion Papers 4309, Institute of Labor Economics (IZA).
    16. Han, Xiaomei & Wang, Jie & Cheng, Hanxiu, 2021. "The effect of corporate tax avoidance on salary distribution——Empirical evidence from publicly listed companies in China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    17. Li, Fei & Tian, Can, 2011. "Directed search and job rotation," MPRA Paper 33875, University Library of Munich, Germany.
    18. BI, Sheng & LI, Yuanyuan, 2015. "Holdup and hiring discrimination with search friction," MPRA Paper 65100, University Library of Munich, Germany.
    19. Lester, Benjamin, 2010. "Directed search with multi-vacancy firms," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2108-2132, November.

    More about this item

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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