When Size Doesn't Matter: How Large Firms Challenge Our Understanding of Labor Markets

Abstract: This article examines a striking empirical regularity that challenges conventional labor economics: within multi-establishment firms, wages appear completely disconnected from establishment size, even though these units operate in distinct labor markets. Drawing on comprehensive evidence from German administrative data covering 25% of private employment, we explore the implications of this "zero employer size wage effect" for our understanding of wage determination and labor market power. While the traditional employer size wage premium—a cornerstone finding suggesting firms move along upward-sloping labor supply curves—holds robustly across single-establishment firms, it vanishes entirely when comparing establishments within the same corporate entity. This pattern proves difficult to reconcile with standard monopsony models but aligns with theories emphasizing above-market wage premia, internal equity norms, and rationed labor supply. The findings carry important implications for practitioners navigating organizational design, compensation architecture, and talent strategy in multi-site operations.

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