The fact that larger businesses pay higher wages has long been considered a stylized fact in the literature. Since Moore (1911), numerous papers have confirmed the presence of a positive firm size-wage premium (e.g., for the United States see Brown and Medoff 1989; Troske 1999; Barth, Davis, and Freeman 2018; Bloom et al. 2018).Both the theoretical and empirical literature have suggested that this positive size premium may, at least partly, reflect productivity differentials amongst firms of different sizes. Significant heterogeneity in productivity exists among firms (Syverson 2011), and theories of the firms predict that this heterogeneity in productivity will translate in size differentials, with more productive firms being also larger (Lucas 1978; Melitz 2003). Models of on-the-job-search predict that high productivity firms will be larger and pay higher wages (Burdett and Mortensen 1998). Moreover, models of imperfect competition in the labor market (e.g., see Manning 2011; Card, Cardoso, and Kline 2018) predict that firm heterogeneity in productivity will affect the distribution of firm size and of firm-specific wage premia, as well as the degree of sorting of different skill groups across firms. Similarly, the empirical literature on rent sharing also provides evidence ofa significant relationship between wages and firms productivity. Existing empirical evidence indeed points to a close link between dispersion in productivity and dispersion in wages, as well as their evolution over time.
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