Canadian jobs and firm size: Do smaller firms pay less?
by René Morissette
Business and Labour Market Analysis Division
Analytical Studies Branch research paper series, No. 035
Recent years have witnessed a growing interest in small firms. Many
studies have shown that small firms are responsible for a substantial
portion of the jobs newly created over the last decade in Canada. This
naturally raises the following question: how do jobs in small firms
compare with those held in larger firms. Are they less likely to be
unionized? Are they less likely to be covered by a pension plan? Are
they more likely to be terminated by a permanent layoff? Do they pay
lower wages?
Using data from the 1986 Labour Market Activity Survey, we find that
the last four questions yield a unique answer: yes. In other words,
jobs in larger firms:
- Are more likely to be unionized;
- Are better covered by pension plans;
- Are less subject to permanent layoffs; and
- Are paid higher wages, on average.
Most importantly, the observed wage differences hold even after controlling
for differences in workers' education level, age and abilities.
The fact that larger firms pay higher wages has quite interesting implications
for labour economics. First, it suggests that wage differences across
Canadian workers may result, not only from differences in education,
work experience and abilities, but also from factors unrelated to workers'
attributes or stated differently from luck. Secondly, as long as women
have lower probabilities than men of working in larger firms, it may
help explain part of the well-known male-female earnings differential.
We estimate these probabilities and find that, even after controlling
for occupation, male workers are more likely than their female counterparts
to work in large firms. This in turn raises the following questions:
Do women prefer working in smaller firms? Did they face discrimination
in large firms in the past?
The fact that larger firms pay higher wages also raises the question
of whether or not industrial policy should pay special attention to
promoting job creation in existing medium-sized and large firms. The
implications of our results for industrial policy are not clear. In
the short run, this may be desirable; it may help shift part of the
labour force towards high value-added activities. However, such a conclusion
does not necessarily hold in the long run. First, one has yet to show
that a dollar spent today on medium-sized or large firms will induce
in the long run a bigger expected increase in the number of high value-added
jobs than a dollar spent on small firms. Secondly, as long as they stimulate
competition among firms in a given industry, small firms may contribute
to an efficient use of resources in the economy.
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