Product Market And The Size-wage Differential

This paper constructs a model to show that plants differing in size pay different wages to homogeneous workers. A large plant can use its large capacity to satisify buyers in the product market more readily and so can charge a higher price than a small plant can. As a result, a large plant has a higher sales revenue per worker. To capture this large revenue, large plants post high wages to recruit. The size-wage differential is shown to survive the labor market competition and entry by new plants. Entry and recruiting generate a stationary distribution of plants in the industry that interacts with the size-wage differential. With numerical examples it is shown that an increase in the demand for the industry's product reduces the size-revenue differential and shifts the size distribution in the industry towards small plants. The overall effect is such that the size-wage differential increases when the product demand is initially low and falls when the product demand is already high.