September 2005

IZA DP No. 1778: Establishment Size and the Dispersion of Wages: Evidence from European Countries

published in: Applied Economics Quarterly, 2006, 52 (4), 309-336

We investigate how the wage distribution differs among small and large establishments in four European countries. Findings show that within-establishment wage dispersion rises with size because large employers have a more diverse workforce. They also suggest that screening and monitoring costs imply a lower sensitivity of wages to ability in larger establishments. Smaller establishments are found to rely more on incentive-based pay mechanisms, particularly in countries with a low trade union coverage rate. Further results indicate that between-establishment wage dispersion decreases with employer size because smaller establishments are technologically more diversified and hence exhibit greater diversity in average workforce skills.