Block size certainly affects miners greatly. An entire block needs to be relayed across all nodes in a timely manner for mining to be decentralized. The more data propagated, the more latency.
That's the same for all miners. Even if they spend a few
seconds downloading the block, and all miners lose a few seconds from the 600 seconds average between blocks, the difficulty will correct for this. One way or another, there will be one block every 10 minutes.
I think
Mike Hearn, who blames the Chinese Great Firewall censorship system for limiting the Chinese miners, could be right. They have the advantage of very cheap (and dirty) electricity, but they don't have decent internet.
And since the hash rate puts them in power, they can stop blocks from growing to protect their interests.
There could be any number of reasons why blocks aren't filling up (or why average block size spiked earlier in the year). There may have been ongoing DOS/spam attacks that have died down. Services (and people) have probably gotten smarter about batching payments and cutting out unnecessary spends (I have). One would think that rationally, miners would be picking up transactions with low (but non-zero) fees instead of mining non-full blocks... so it may be a matter of fee policy enforcement, as we do see a steady ~2000 unconfirmed transactions even after many 100-600kb blocks in a row.
Mike Hears says this:
The reason the true limit seems to be 700 kilobytes instead of the theoretical 1000 is that sometimes miners produce blocks smaller than allowed and even empty blocks, despite that there are lots of transactions waiting to confirm
It could very well be the miners simply don't care about the transaction fees! They get 12.5
BTC, and if they spend a few seconds on processing waiting transactions, they risk losing the block to someone else. So they skip the transactions and claim the 12.5
BTC as fast as they can. If this is the case, the block reward does the opposite of what it should do: enable transactions! It may need several more halvings for this behaviour to change.