Profit Sharing and the Firm‐Size Wage Premium

Abstract

This study analyzes the relationships among wages, firm size, and profit sharing schemes. We develop a simple theoretical model and explore the relationship empirically using high‐quality panel data. The theoretical model shows that the firm‐size wage premium decreases in the presence of profit sharing. The empirical results based on rich matched employee‐employer data for private sector wage earners in Finland show that the firm‐size wage premium is modest, and it becomes negligible when we account for profit sharing and covariates describing assortative matching and monopsony behavior. The analysis suggests that profit sharing schemes embody effects of firm‐specific unobservables that raise productivity, support rent sharing, and boost wages.

Hierarchy and the Employer Size Effect on Wages: Evidence from Britain

“…1998; Pehkonen et al. 2017), a cross‐section of five European countries (Lallemand et al. 2007), a cross‐section of nine OECD countries (Gibson and Stillman 2009), 1 Latin American countries (Mizala and Romaguera 1998), and developing African countries (Strobl and Thornton 2004).…”

“…While these results come from the USA, similar evidence exists for many countries. An unexplained establishment size effect has been found for the UK (Main and Reilly 1993;Green et al 1996;Manning 2003), Canada (Morissette 1993;Reilly 1995), Germany (Schmidt and Zimmermann 1991;Gerlach and Schmidt 1995;Andrews et al 2012), Austria (Winter-Ebmer 2001Gruetter and Lalive 2009), France (Abowd et al 1999;Fakhfakh and Fitzroy 2006), Switzerland (Winter-Ebmer and Zweimuller 1999), Italy (Brunello and Colussi 1998;Scoppa 2014), Nordic countries (Albaek et al 1998;Pehkonen et al 2017), a cross-section of five European countries (Lallemand et al 2007), a cross-section of nine OECD countries (Gibson and Stillman 2009), 1 Latin American countries (Mizala and Romaguera 1998), and developing African countries (Strobl and Thornton 2004).…”

Profit sharing and firm profitability

“…Lowitzsch et al, 2014;Poutsma et al, 2006;Pendleton et al, 2002). Pehkonen et al (2017) provide descriptive evidence on wages, firm characteristics and profit sharing scheme adoption in the Finnish labor market.…”