Small companies may offer higher starting wages for entry-level positions than larger firms, potentially attracting better talent, despite large companies having greater influence in the market. New research from Cornell sheds light on this dynamic.

“When a firm’s productivity and worker skills complement each other, it makes sense for more productive firms to attract more skilled workers,” explains the study’s author.

Higher pay

Under typical conditions—when firms hire similar numbers of workers or when the labor pool is large—more productive companies are expected to offer higher wages and thereby draw in better-qualified employees.

However, in high-skill labor markets with a limited supply of workers, market power comes into play. “In larger firms, vacant positions compete with one another for talent,” the researcher notes, “which can lead to lower wages at big firms, resulting in a mismatch.”

One key finding is that offering different wages for the same role within a company doesn’t provide much advantage. Even the small benefits of paying equal wages—like reducing workplace tensions or avoiding salary negotiations—might push firms to keep wages uniform across vacancies.

Complex recruitment

The researcher was frustrated by the limitations of previous studies, which often assumed that each company hired just one worker, ignoring the complexities of firms with varying hiring needs and market power. “I found it odd that the early models assumed all firms had the same hiring needs,” he remarked. “Real labor markets are far more varied.”

The study shows that when worker skills are spread evenly, firms don’t gain much from offering different wages. But in reality, large firms with more vacancies may struggle to attract top talent. Without “within-firm rivalry,” larger companies may end up hiring less-skilled workers compared to smaller competitors.

This competition between vacancies at large firms keeps wages lower. “If I’m a big firm and offer higher wages for one role, I hurt my other vacancies,” the researcher explains. “So in equilibrium, I have less incentive to post high wages than a small firm with only one opening.”

Despite hiring less-skilled workers, larger firms still enjoy higher profits. However, their profit per worker decreases, which could lead them to reduce vacancies to attract better talent.

It might seem logical that large, productive firms grew by hiring the best workers, but that’s not always the case. “A lot of market power starts on the output side,” the author concludes. “Look at Amazon—a great business idea paired with solid execution gave it massive market power, which later affected its hiring practices as well.”