According to recent research conducted by the Cornell SC Johnson College of Business, there is a common expectation that companies with the authority to determine wages will strive to minimize them. However, this study challenges that assumption by highlighting a different trend. It reveals that prominent companies, when adopting a strategy where their departments compete for new hires, can actually attract highly skilled workers by offering slightly higher wages.

“There is a lot of discussion of big firms’ effects on markets, whether it’s the power to set prices or wages,” the researchers explain “We asked ourselves, how bad are these large firms for workers in the labor market?”

Impact on wages

In the pursuit of shedding light on this matter, researchers crafted a theoretical framework that explores the dynamics of competition between large and small firms for workers possessing varying skill sets. This model specifically applies to labor markets dealing with entry-level positions, where a multitude of employment offers are extended to a substantial pool of workers.

And what were their findings?

In true scholarly fashion, the researchers respond with a nuanced explanation. Consider, for instance, a sizeable healthcare organization that holds sway over the majority of hospitals and doctors’ practices within a particular region. Such an entity wields significant power in the local labor market, as nurses in the vicinity have limited alternatives for employment. Capitalizing on this restricted choice, the organization could exploit the situation by suppressing nurses’ wages.

However, this strategy only proves effective when the organization centralizes its hiring practices—an approach that is not commonly observed among many large firms. Instead, it is often the case that individual departments or units within a larger organization take charge of their own recruitment processes, essentially competing against one another to secure the same pool of talent.

Self-competition

Now, one might wonder, why would an organization engage in self-competition? The answer lies in a strategic motive behind decentralizing hiring procedures. By allowing internal departments to vie for candidates, the organization can attract a more highly skilled workforce while only marginally increasing wages. Consequently, smaller firms end up employing the remaining pool of workers with lower skill levels.

Nevertheless, it is important to acknowledge that very large firms, armed with their labor market dominance, still possess the ability—and indeed exercise it—to influence wages. When a company successfully hires a substantial proportion of available workers, it already secures a significant share of highly skilled individuals. In such cases, permitting internal competition between the company’s departments does not significantly impact talent acquisition. Consequently, the motivation for driving wages down remains strong.

“Theoretical models offer a way to hypothesize about how things work in the real world, and then it’s the role of the empirical and data scientists to test the model,” the authors conclude. “It would be interesting if an empirical economist took this model and tested it against existing data.”