Product market and the size-wage differential

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Using directed search to model the product market and the labor market, I show that large plants can pay higher wages to homogeneous workers and earn higher expected profit per worker than small plants, although plants are identical except size. A large plant charges a higher price for its product and compensates buyers with a higher service probability. To capture this size-related benefit, large plants try to become larger by recruiting at high wages. This size-wage differential survives labor market competition because a high wage is harder to get than a low wage, Moreover, the size-wage differential increases with the product demand when demand is initially low and falls when demand is already high.

Original languageEnglish (US)
Pages (from-to)21-54
Number of pages34
JournalInternational Economic Review
Issue number1
Publication statusPublished - Jan 1 2002


All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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