Abstract
We use an extensive, matched employer–employee dataset to analyze the employer-size wage relation and its contribution to wage inequality in Germany. Applying models with additive fixed effects for workers and establishments, we document that the large firm wage premium (LFWP), which rose over 25 years, has only recently started to decrease. Our decomposition shows that firm size explains a significant share of the trends in wage inequality. The LFWP accounts for about 20% of the rise in wage inequality from the mid 80s to 2010. From 2010 onward, wage inequality has slightly declined and the LFWP accounts for 33% of this trend reversal.
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