A Selectivity Model of Employer-Size Wage Differentials

This article investigates wage differentials for employees of different size firms utilizing an econometric methodology that allows the size of employer to be treated as endogenous in the context of discrete ordered employer-size data. As a result, the authors are able to estimate (1) employer-size wage gaps, which are corrected for selectivity bias, and (2) the magnitude and direction of the selection bias. Decompositions of the resulting wage differentials are computed, with comparisons of the conditional (on sorting across employer size) and unconditional wage gaps.