Evidence on Adverse Selection and Establishment Size in the Labor Market
Industrial and Labor Relations Review Volume 56, #1, October 2002, pp. 84-96.

Abstract: Different studies have found that laid-off workers exhibit greater wage losses than those who lose their job due to plant closures, and this evidence has been interpreted as being consistent with the theory of adverse selection. But none of these analyses have considered the effect of establishment size in this framework. Using the National Longitudinal Survey of Youth, this study will show that equally able workers are paid more at larger establishments, layoffs are much more likely than plant closures to occur at larger establishments, and these two groups of workers tend to find post-displacement employment at establishments of similar sizes. Accounting for the effect of establishment size removes virtually all of the difference in wage losses for these two groups of workers. These findings do not support the hypothesis that adverse selection is the cause of the greater wage losses of laid-off workers, suggesting instead that they are due to the layoff group's loss of efficiency wages or greater firm-specific training offered at large establishments.