Small Employers, Large Employers and the Skill Premium over the Business Cycle

Abstract

For the USA in 1987–2017, I document, at business cycle frequencies, that the employer-size wage premium of high-skill workers tends to be high (low) in times of low (high) unemployment relative to that of low-skill workers. The differential size wage premium between high-skill and low-skill workers has an unconditional correlation of –0.6 with the aggregate unemployment rate in 1987–2007. An above-trend increase in the unemployment rate by one percentage point is associated with a decrease in the differential size wage premium by around 1.8–2.3 percentage points. Nevertheless, the skill wage premium is not negatively correlated with aggregate unemployment consistently.

Keywords: employer-size wage premium, skill premium, economic fluctuations, business cycles, Current Population Survey

JEL Classification: D22, E32, J31, I26