Promotion policy, wage and firm size

In contrast to the predictions of conventional economic theory, it is well documented that similar workers receive wages positively correlated with the size of the firm employing them. To explain these findings the author augments the Waldman framework (Job Assignments, Signaling, and Efficiency, 1984) by adding a size variable and construct a dynamic model of promotion and workers' transitions where the firms' competition over workers is via the promotion policy and the wage levels. In equilibrium, managers in larger firms are on average better, thus commanding and receiving a higher wage than their counterparts in smaller firms, while the laborers of the larger firms receive higher wages to compensate them for the lower promotion rates in such firms. Hence the wage-size correlation is shown to be consistent with conventional economic theory in a large class of plausible environments. --