Fact of the Week: Large Start-Ups Pay New Hires 9 Percent More than Comparable Established Firms

October 15, 2018

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Only a quarter of all start-ups pay new hires more than established firms—but large start-ups pay 9 percent more than comparable established firms.

Source: M. Diane Burton, Michael S. Dahl, and Olav Sorenson, “Do Start-ups Pay Less?” December 2017, Industrial and Labor Relations Review.

Commentary: Policymakers tend to give an outsized share of attention and credit to small businesses, touting their role in entrepreneurship, but in doing so they often conflate small businesses with new businesses. Start-ups are important for their contributions to creative destruction and innovation, but small businesses are less efficient because they cannot take advantages of economies of scale. A new paper highlights this distinction by examining Danish firms between 1991 and 2006.

Denmark’s economy avoids some common confounding variables in comparing workers’ compensation, due to strong norms against long hours and non-wage compensation, which allows researchers to clearly compare firms by their size and age. While most young firms pay less than older firms, this effect reverses when comparing similarly sized firms. Controlling for industry and workers’ ages, genders, levels of education, and prior work experience, start-ups with at least 250 employees pay their new hires 9.4 percent more than established firms of the same size, with smaller premiums being observed across all firm sizes. Start-ups certainly can be an engine for high-paying jobs, but small businesses predominantly are not.