Working Paper

This paper presents novel evidence from a matched employer-employee data set in the US, investigating a close connection between initial worker flow and dispersion of firm size over time. I find that fast-growing firms replace many workers early on while firms with slow growth do not, leading to a persistent and widening size gap between them. These empirical facts imply that the cleansing process at the firm level is central to understanding the dispersion of firm size. To fully account for the tight link between worker and job flow, I introduce a model in which an employer learns about their employees' productivity, replaces unproductive workers, and grows over the life cycle. Fast-growing firms not only hire more workers but have a better composition. With this mechanism, the size of the gap is dictated by the persistence of firms' learning ability. This model explains why a firm's dynamism is affected by workers, and highlights the importance of labor market flexibility in firm growth.