Does firm size influence wages? What are the implications of labour and capital market imperfections for the relationship between firm size and earnings?

There is a striking contrast between the economy of South Africa and many other Africa economies in that while in the former, measured unemployment is very high and closely linked to poverty, in other African countries, for example Ghana, measured unemployment is very low. What the economies have in common is that one key component of whether or not a household is poor is whether they have access to wage jobs. In countries like Ghana the alternative to wage employment is self-employment.

Work on wage determination under this part of the programme has begun by focusing on comparative work on Kenya and Ghana. In particular the project is asking how firm effects influence wages and investigating the implications of labour and capital market imperfections for the relationship between firm size and earnings. To establish that such a question is of interest it is necessary to show that the firm size-wage effect cannot be explained by either the observed or unobserved skills of the workforce or the characteristics of the workplace. To do that, data is required where controls are possible for observable time-varying firm and worker characteristics, as well as the unobservable characteristics of both the firm and its workers. As part of the research programme such data is being collected and we now have data which is a sample of workers matched with firms over time. Such data ensure that we can control for a range of factors which it is not possible to do with other data sets.

Changes in wages are shown to respond to changes both to profits per employee and the size of the firm. It is argued that these empirical results clearly reject the hypothesis that the firm-size relationship can be explained by the skills of the workers. They can be shown to be consistent with some forms of non-competitive theories of bargaining and efficiency wages.