Everyone knows that big firms pay more: that’s why people want to work there. There are a few explanations as to why this might be the case. Maybe big firms make greater rents by exercising market power. maybe they can attract more skilled workers. Maybe there are economies of scale which make them more efficient and increase the productivity of their workers.
A recent study by John Gibson and Steve Stillman has a look at whether it’s attributable to higher skills:
We use the International Adult Literacy Survey, which gives richer skill measures than those typically available in labor market surveys, to measure the BFP in nine countries with and without controls for worker skill. The results show that the BFP is not as universal as is often suggested, but in countries where it exists controlling for skills does little to reduce the size of the BFP.
So, no, it’s not a skill thing. They do actually pay more for workers with the same skills. Gibson and Stillman point out that the policy response depends on what you think the cause is. If it’s market power causing it then maybe you want to rein in the big firms. if it’s increased productivity then maybe you want to let them run free and just watch the prices they charge a little more carefully.
I know a lot of lawyers so I’ve always associated big firms with big money, but even bigger hours worked. I did a quick Google search on ‘big firm hours worked’ and almost every hit on the first few pages was a legal one, so maybe that’s specific to the law profession. If anyone has a chart of firm size against hours worked I’d be interested to see it, though 🙂