Risky Business? Earnings Prospects of Employees at Young Firms

Young firms are an engine of job creation. However, little is known about the quality of the jobs that these firms offer. I use a matched employer-employee dataset to study how starting wages and lifecycle earnings of employees differ between young and mature firms. I find that young firms initially pay a 1-2% wage premium to new hires, but wages subsequently grow more slowly at young firms compared to their mature counterparts, both within continuing job matches and when individuals change employers. These results are confirmed by several approaches to accounting for potential selection of employees into young firms based on observable and unobservable characteristics. There is substantial heterogeneity of outcomes: young firms that survive and become highly productive pay higher wages to their employees from the outset than less successful young firms. Crucially, the characteristics of young firms and the nature of the jobs that they offer have deteriorated since the mid-2000s. I document a worsening of young firms’ survival rates and productivity outcomes, both in absolute terms and relative to mature firms over the same period. These trends coincide with a significant decline in relative wages at young firms. Highly-paid and stable jobs at young firms have thus become increasingly rare.