Entrepreneurial Wages

48 Pages Posted: 2 Jun 2018 Last revised: 3 Dec 2018

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Wenting Ma

Isenberg School of Management, UMass Amherst

Paige Ouimet

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Rebecca Zarutskie

Board of Governors of the Federal Reserve System

Date Written: March 1, 2018

Abstract

Why do young firms pay less? Previous studies have argued that employees willingly accept lower wages at new firms in response to offsetting benefits. A second literature argues that lower wages at new firms are driven by the selection of lower quality workers into new firms, firms which are likely to be of lower productivity or financially constrained. Using US Census employer-employee matched data, we show new evidence consistent with the selection argument. After including worker fixed effects, nearly three quarters of the new firm wage difference disappears. Moreover, once we control for firm fixed effects, absorbing time-invariant firm quality, the wage difference between new and established firms becomes economically unimportant. Overall, our findings indicate that, for a given worker who has job opportunities at similar quality new and established firms, the expected wage penalty of working at the new firm is, on average, economically insignificant. Moreover, young firms that can hire high quality workers have higher future survival rates and total employment, suggesting that human capital is an important predictor of young firm success.

Keywords: Entrepreneurship, Start-ups, Wages

JEL Classification: M13, J31, L26

Suggested Citation

Babina, Tania and Ma, Wenting and Ouimet, Paige and Zarutskie, Rebecca, Entrepreneurial Wages (March 1, 2018). Columbia Business School Research Paper No. 18-47, Available at SSRN: https://ssrn.com/abstract=3177153 or http://dx.doi.org/10.2139/ssrn.3177153

Tania Babina

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Wenting Ma (Contact Author)

Isenberg School of Management, UMass Amherst ( email )

650 North Pleasant Street
Amherst, MA 01003
United States

Paige Ouimet

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Rebecca Zarutskie

Board of Governors of the Federal Reserve System ( email )

20th Street and C Streets NW
Mailstop 155-B
Washington, DC 20551
United States
202-452-5292 (Phone)

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