Entrepreneurial Wages

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.