Large Firms and Internal Labor Markets

Abstract

This paper studies the interaction between the size of a firm and the labor market outcomes of its workers. In our model, firms are internal labor markets where workers are matched with occupations. The quality of matches is uncertain and learned over time. Larger firms offer more opportunities to workers to find a suitable occupational match. In equilibrium, workers in larger firms are employed in better matches and earn higher wages. Conditional on wages, they are less likely to separate from the firm, but more likely to switch occupations within the firm, while the wage premium is higher for workers with longer tenure. We find support for the implications of the model using data from the SIPP. Keywords: Size-Wage Premium, Internal Labor Markets, Occupational Mobility, Separation Rates

JEL codes