Firm size and job quality: A survey of the evidence from Germany

Small firms provide and create a large proportion of jobs in Germany. Are these jobs worse than jobs in larger firms? The mosaic picture that emerges from a review of several recent empirical studies using German individual or firm level micro data shows that, all in all, wages are lower, non-wage incomes (fringes) are lower, job security is lower, work organisation is less rigid, institutionalized possibilities for workers' participation in decision making are weaker, and opportunities for skill enhancement are worse in small firms compared to large firms. The weight of evidence, therefore, indicates that, on average, small firms offer worse jobs than large firms. It is argued that there is no need for policy measures targeted to improve job quality in small firms, because higher incomes in large firms can in part be seen as compensating differentials for more rigid work organisation, and can follow from wage policies to reduce shirking and turnover that is more costly in large than in small firms. Furthermore, a lower level of remuneration, less protection against dismissals, a lower level of workers' participation, and less opportunities for further training all contribute to lower costs in small firms that might be needed to compensate for size-related cost disadvantages compared to large firms. Economic policy should concentrate on keeping barriers to entrepreneurs' entry to markets low to foster new firm formation and creative destruction.