Researchers have long known that large firms pay higher wages than small firms for workers with similar measured characteristics; however, an agreed-upon explanation for this firm size wage effect (FSWE) has not been reached. Recent changes in the economy provide new leverage for testing competing theories for the effect, while questions about the existence and nature of the “New Economy” provide new motivation for exploring this topic. This study uses the 1988-2003 Current Population Survey and finds that the FSWE has declined by about one third over the study period. Examining the competing explanations for the FSWE, this study finds that while the sorting of workers by traits, unions, and industry factors all contribute to some portion of the effect in cross-section, they fail to explain why it has declined over time. Market power explanations also fail to find support. Shifts in organizational structures, particularly a decline of internal labor markets, appear to best fit the results. These findings provide supporting evidence for the “New Economy” and the idea that recent decades have brought about significant changes within organizations and in employment opportunities.
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