Who Gets Good Jobs? The Hiring Decisions and Compensation Structures of Large Firms

Abstract

The firm-specific human capital theory implies that large firms prefer to hire younger workers because they invest more in workers than small firms do and because those investments are fixed costs. In this paper, I use data from the Benefits Supplement to the Current Population Survey (CPS) to demonstrate that large firms indeed hire younger workers than small firms, especially for white-collar occupations. I present a simple model of firm cost minimization within an employee search framework, which is consistent with large firms’ propensity to hire younger workers, and has additional testable implications regarding large firms’ compensation structures. First, since young workers are more valuable to large firms than to small firms, large firms ofier higher starting wages to attract them. This implies flatter starting wage—age profiles among the new hires in large firms. Second, since large firms invest more in workers, they continue to pay higher wages to retain the trained employees. This implies steeper wage-tenure profiles in large firms. Both predictions are borne out by the CPS data. Most strikingly, for the newly hired white-collar workers, not only are the starting wage-age profiles flatter in large finns, but also the size-wage premium disappears for workers hired at age 35 or older. Furthermore, by exploiting cost variations in dimensions other than firm size, such as occupation and industry, this model has additional testable implications. More specifically, an extension of the simple model would imply that, for high training occupations, workers displaced at older ages suffer greater wage losses than younger workers because they have a harder time finding a new good job that requires high investments. But there should be no systematic difference in wage loss by age for occupations that require little training. This prediction is supported by the data from the Displaced Worker Surveys. Finally, limited evidence from the BLS Survey of Employer Provided Training 1995 and the CPS suggests that industries that train more also appear to hire younger workers.