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PRODUCT MARKET AND THE SIZE–WAGE DIFFERENTIAL*
Author(s) -
SHI SHOUYONG
Publication year - 2002
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00002
Subject(s) - wage , differential (mechanical device) , homogeneous , economics , product market , product (mathematics) , competition (biology) , profit (economics) , labour economics , market size , efficiency wage , microeconomics , commerce , incentive , engineering , thermodynamics , aerospace engineering , ecology , physics , geometry , mathematics , biology
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.