Who Gets Good Jobs? The Hiring Decisions and Compensation Structures of Large Firms


The firm-specific human capital theory implies that large firms prefer to hire younger workers
because they invest more in workers than small firms do and because those investments are fixed
costs. In this paper, I use data from the Benefits Supplement to the Current Population Survey
(CPS) to demonstrate that large firms indeed hire younger workers than small firms, especially for
white-collar occupations. I present a simple model of firm cost minimization within an employee
search framework, which is consistent with large firms’ propensity to hire younger workers, and has
additional testable implications regarding large firms’ compensation structures. First, since young
workers are more valuable to large firms than to small firms, large firms ofier higher starting wages
to attract them. This implies flatter starting wage—age profiles among the new hires in large firms.
Second, since large firms invest more in workers, they continue to pay higher wages to retain the
trained employees. This implies steeper wage-tenure profiles in large firms. Both predictions are
borne out by the CPS data. Most strikingly, for the newly hired white-collar workers, not only are
the starting wage-age profiles flatter in large finns, but also the size-wage premium disappears for
workers hired at age 35 or older.
Furthermore, by exploiting cost variations in dimensions other than firm size, such as occupation
and industry, this model has additional testable implications. More specifically, an extension of
the simple model would imply that, for high training occupations, workers displaced at older ages
suffer greater wage losses than younger workers because they have a harder time finding a new good
job that requires high investments. But there should be no systematic difference in wage loss by
age for occupations that require little training. This prediction is supported by the data from the
Displaced Worker Surveys. Finally, limited evidence from the BLS Survey of Employer Provided
Training 1995 and the CPS suggests that industries that train more also appear to hire younger

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Econometrica, Vol. 70, No. 6, November, 2002
Working Papers