IDEAS home Printed from https://ideas.repec.org/a/eee/respol/v47y2018i3p637-649.html
   My bibliography  Save this article

Is there a startup wage premium? Evidence from MIT graduates

Author

Listed:
  • Kim, J. Daniel

Abstract

While startups are the center of extensive policy discussion given their outsized role in job creation, it is not clear whether they create high quality jobs relative to incumbent firms. This paper investigates the wage differential between venture capital-backed startups and established firms, given that the two firm types compete for talent. Using data on MIT graduates, I find that non-founder employees at VC-backed startups earn roughly 10% higher wages than their counterparts at established firms. To account for unobserved heterogeneity across workers, I exploit the fact that many MIT graduates receive multiple job offers. I find that wage differentials are statistically insignificant from zero when individual fixed effects are included. This implies that much of the startup wage premium in the cross-section can be attributed to selection, and that VC-backed startups pay competitive wages for talent. To unpack the selection mechanism, I show that individual preferences for risk as well as challenging work strongly predict entry into VC-backed startups.

Suggested Citation

  • Kim, J. Daniel, 2018. "Is there a startup wage premium? Evidence from MIT graduates," Research Policy, Elsevier, vol. 47(3), pages 637-649.
    • Handle: RePEc:eee:respol:v:47:y:2018:i:3:p:637-649
    DOI: 10.1016/j.respol.2018.01.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0048733318300106
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.respol.2018.01.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?," American Economic Review, American Economic Association, vol. 100(3), pages 1238-1260, June.
    2. Gompers, Paul A. & Mukharlyamov, Vladimir & Xuan, Yuhai, 2016. "The cost of friendship," Journal of Financial Economics, Elsevier, vol. 119(3), pages 626-644.
    3. Dorner, Matthias & Fryges, Helmut & Schopen, Kathrin, 2017. "Wages in high-tech start-ups – Do academic spin-offs pay a wage premium?," Research Policy, Elsevier, vol. 46(1), pages 1-18.
    4. Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 73-142.
    5. Ross Levine & Yona Rubinstein, 2017. "Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 963-1018.
    6. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    7. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start‐Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, February.
    8. Gustavo Manso, 2016. "Experimentation and the Returns to Entrepreneurship," Review of Financial Studies, Society for Financial Studies, vol. 29(9), pages 2319-2340.
    9. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-1059, October.
    10. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 503-530.
    11. Ola Bengtsson & John R. M. Hand, 2013. "Employee Compensation in Entrepreneurial Companies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 312-340, June.
    12. Scott Shane, 2009. "Why encouraging more people to become entrepreneurs is bad public policy," Small Business Economics, Springer, vol. 33(2), pages 141-149, August.
    13. Ryan Decker & John Haltiwanger & Ron Jarmin & Javier Miranda, 2014. "The Role of Entrepreneurship in US Job Creation and Economic Dynamism," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 3-24, Summer.
    14. Manju Puri & Rebecca Zarutskie, 2012. "On the Life Cycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms," Journal of Finance, American Finance Association, vol. 67(6), pages 2247-2293, December.
    15. Michael Roach & Henry Sauermann, 2015. "Founder or Joiner? The Role of Preferences and Context in Shaping Different Entrepreneurial Interests," Management Science, INFORMS, vol. 61(9), pages 2160-2184, September.
    16. Katya Kartashova, 2014. "Private Equity Premium Puzzle Revisited," American Economic Review, American Economic Association, vol. 104(10), pages 3297-3334, October.
    17. Sabrina T. Howell, 2017. "Financing Innovation: Evidence from R&D Grants," American Economic Review, American Economic Association, vol. 107(4), pages 1136-1164, April.
    18. Benjamin A. Campbell, 2013. "Earnings Effects of Entrepreneurial Experience: Evidence from the Semiconductor Industry," Management Science, INFORMS, vol. 59(2), pages 286-304, February.
    19. Robert E. Hall & Susan E. Woodward, 2010. "The Burden of the Nondiversifiable Risk of Entrepreneurship," American Economic Review, American Economic Association, vol. 100(3), pages 1163-1194, June.
    20. Scott Stern, 2004. "Do Scientists Pay to Be Scientists?," Management Science, INFORMS, vol. 50(6), pages 835-853, June.
    21. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    22. William R. Kerr & Ramana Nanda & Matthew Rhodes-Kropf, 2014. "Entrepreneurship as Experimentation," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 25-48, Summer.
    23. Borjas, George J & Bronars, Stephen G, 1989. "Consumer Discrimination and Self-employment," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 581-605, June.
    24. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
    25. Charles Brown, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(1), pages 113-134.
    26. Paul Gompers & Josh Lerner & David Scharfstein, 2005. "Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999," Journal of Finance, American Finance Association, vol. 60(2), pages 577-614, April.
    27. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
    28. Baumol, William J., 1996. "Entrepreneurship: Productive, unproductive, and destructive," Journal of Business Venturing, Elsevier, vol. 11(1), pages 3-22, January.
    29. Kristina Nyström & Gulzat Zhetibaeva Elvung, 2015. "New Firms as Employers: The Wage Penalty for Voluntary and Involuntary Job Switchers," LABOUR, CEIS, vol. 29(4), pages 348-366, December.
    30. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
    31. repec:eee:labchp:v:3:y:1999:i:pb:p:2165-2214 is not listed on IDEAS
    32. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214, Elsevier.
    33. Antoinette Schoar, 2010. "The Divide between Subsistence and Transformational Entrepreneurship," NBER Chapters, in: Innovation Policy and the Economy, Volume 10, pages 57-81, National Bureau of Economic Research, Inc.
    34. Daniel W. Elfenbein & Barton H. Hamilton & Todd R. Zenger, 2010. "The Small Firm Effect and the Entrepreneurial Spawning of Scientists and Engineers," Management Science, INFORMS, vol. 56(4), pages 659-681, April.
    35. David H. Hsu, 2004. "What Do Entrepreneurs Pay for Venture Capital Affiliation?," Journal of Finance, American Finance Association, vol. 59(4), pages 1805-1844, August.
    36. Thomas Philippon, 2010. "Financiers versus Engineers: Should the Financial Sector Be Taxed or Subsidized?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 158-182, July.
    37. Steve J. Davis & John Haltiwanger, 1991. "Wage Dispersion Between and Within U.S. Manufacturing Plants, 1963-1986," NBER Working Papers 3722, National Bureau of Economic Research, Inc.
    38. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
    39. Jorge Guzman & Scott Stern, 2016. "The State of American Entrepreneurship: New Estimates of the Quality and Quantity of Entrepreneurship for 32 US States, 1988-2014," NBER Working Papers 22095, National Bureau of Economic Research, Inc.
    40. Henry Sauermann, 2017. "Fire in the Belly? Employee Motives and Innovative Performance in Startups versus Established Firms," NBER Working Papers 23099, National Bureau of Economic Research, Inc.
    41. Baron, James N & Burton, M Diane & Hannan, Michael T, 1996. "The Road Taken: Origins and Evolution of Employment Systems in Emerging Companies," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 5(2), pages 239-275.
    42. Michael S. Dahl & Steven Klepper, 2015. "Whom do new firms hire?," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 24(4), pages 819-836.
    43. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    44. Charles Brown & James L. Medoff, 2003. "Firm Age and Wages," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 677-698, July.
    45. Ouimet, Paige & Zarutskie, Rebecca, 2014. "Who works for startups? The relation between firm age, employee age, and growth," Journal of Financial Economics, Elsevier, vol. 112(3), pages 386-407.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Muralidharan Loganathan, 2022. "Competing for Technology Talent: Listed Companies Versus Funded Startups in India," International Journal of Global Business and Competitiveness, Springer, vol. 17(1), pages 64-72, June.
    2. Michael Roach & Henry Sauermann & John Skrentny, 2019. "Are Foreign Stem PhDs More Entrepreneurial? Entrepreneurial Characteristics, Preferences and Employment Outcomes of Native and Foreign Science & Engineering PhD Students," NBER Working Papers 26225, National Bureau of Economic Research, Inc.
    3. Michael Ewens Author-1-Name-First: Michael Author-1-Name-Last: Ewens & Ramana Nanda Author-2-Name-First: Ramana Author-2-Name-Last: Nanda & Christopher Stanton Author-3-Name-First: Christopher Author-, 2020. "Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship," Harvard Business School Working Papers 20-119, Harvard Business School, revised Sep 2023.
    4. Daniel Fackler & Lisa Hölscher & Claus Schnabel & Antje Weyh, 2022. "Does working at a start-up pay off?," Small Business Economics, Springer, vol. 58(4), pages 2211-2233, April.
    5. Jiayi Bao, 2022. "Social safety nets and new venture performance: The role of employee access to paid family leave benefits," Strategic Management Journal, Wiley Blackwell, vol. 43(12), pages 2545-2576, December.
    6. Ewens, Michael & Nanda, Ramana & Stanton, Christopher, 2020. "The Evolution of CEO Compensation in Venture Capital Backed Startups," SocArXiv rku3m, Center for Open Science.
    7. Kristina Nyström, 2021. "Working for an entrepreneur: heaven or hell?," Small Business Economics, Springer, vol. 56(2), pages 919-931, February.
    8. Li Jing & Huying Zhang, 2023. "Venture Capital, Compensation Incentive, and Corporate Sustainable Development," Sustainability, MDPI, vol. 15(7), pages 1-19, March.
    9. J. Daniel Kim, 2022. "Startup acquisitions, relocation, and employee entrepreneurship," Strategic Management Journal, Wiley Blackwell, vol. 43(11), pages 2189-2216, November.
    10. Joonkyu Choi & Nathan Goldschlag & John C. Haltiwanger & J. Daniel Kim, 2021. "Early Joiners and Startup Performance," NBER Working Papers 28417, National Bureau of Economic Research, Inc.
    11. Olav Sorenson & Michael S. Dahl & Rodrigo Canales & M. Diane Burton, 2021. "Do Startup Employees Earn More in the Long Run?," Organization Science, INFORMS, vol. 32(3), pages 587-604, May.
    12. Cheng, Ruiqi & Yuan, Peng & Jiang, Gongxiong, 2023. "Growth, agglomeration externalities, and survival: Evidence from Chinese manufacturing start-ups," Journal of Business Research, Elsevier, vol. 154(C).
    13. Mahieu, Jeroen, 2020. "Creative Destruction? Local Business Conditions and the Earnings of Employees at Startups," MPRA Paper 98557, University Library of Munich, Germany.
    14. Seung Hoon D. Chung & Simon C. Parker, 2023. "Founder affiliations: jobseeker reactions and impact on employee recruitment by start-up ventures," Small Business Economics, Springer, vol. 61(1), pages 259-283, June.
    15. Carlos Díaz-Santamaría & Jacques Bulchand-Gidumal, 2021. "Econometric Estimation of the Factors That Influence Startup Success," Sustainability, MDPI, vol. 13(4), pages 1-14, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sari Pekkala Kerr & William R. Kerr & Tina Xu, 2017. "Personality Traits of Entrepreneurs: A Review of Recent Literature," NBER Working Papers 24097, National Bureau of Economic Research, Inc.
    2. Sabrina T. Howell, 2017. "Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions," NBER Working Papers 23874, National Bureau of Economic Research, Inc.
    3. Ross Levine & Yona Rubinstein, 2018. "Selection into Entrepreneurship and Self-Employment," NBER Working Papers 25350, National Bureau of Economic Research, Inc.
    4. Ross Levine & Yona Rubinstein, 2017. "Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 963-1018.
    5. Knutsson, Polina, 2018. "Sorting on Unobserved Skills into New Firms," Working Papers 2018:38, Lund University, Department of Economics.
    6. Vladasel, Theodor & Lindquist, Matthew J. & Sol, Joeri & van Praag, Mirjam, 2021. "On the origins of entrepreneurship: Evidence from sibling correlations," Journal of Business Venturing, Elsevier, vol. 36(5).
    7. Tania Babina & Wenting Ma & Christian Moser & Paige Ouimet & Rebecca Zarutskie, 2019. "Pay, Employment, and Dynamics of Young Firms," Working Papers 19-23, Center for Economic Studies, U.S. Census Bureau.
    8. Henry Sauermann, 2017. "Fire in the Belly? Employee Motives and Innovative Performance in Startups versus Established Firms," NBER Working Papers 23099, National Bureau of Economic Research, Inc.
    9. Catherine, Sylvain, 2022. "Keeping options open: What motivates entrepreneurs?," Journal of Financial Economics, Elsevier, vol. 144(1), pages 1-21.
    10. Pierre Azoulay & Benjamin F. Jones & J. Daniel Kim & Javier Miranda, 2020. "Age and High-Growth Entrepreneurship," American Economic Review: Insights, American Economic Association, vol. 2(1), pages 65-82, March.
    11. Jeroen Mahieu & Francesca Melillo & Peter Thompson, 2022. "The long‐term consequences of entrepreneurship: Earnings trajectories of former entrepreneurs," Strategic Management Journal, Wiley Blackwell, vol. 43(2), pages 213-236, February.
    12. Michelacci, Claudio & Schivardi, Fabiano, 2020. "Are they all like Bill, Mark, and Steve? The education premium for entrepreneurs," Labour Economics, Elsevier, vol. 67(C).
    13. Tania Babina & Sabrina T. Howell, 2018. "Entrepreneurial Spillovers from Corporate R&D," NBER Working Papers 25360, National Bureau of Economic Research, Inc.
    14. Bernstein, Shai & Colonnelli, Emanuele & Malacrino, Davide & McQuade, Tim, 2022. "Who creates new firms when local opportunities arise?," Journal of Financial Economics, Elsevier, vol. 143(1), pages 107-130.
    15. Marco Caliendo & Frank M Fossen & Alexander S Kritikos, 2022. "Personality characteristics and the decision to hire [Do the unemployed become successful entrepreneurs?]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 31(3), pages 736-761.
    16. Pietro Santoleri, 2020. "Innovation and job creation in (high-growth) new firms [An international cohort comparison of size effects on job growth]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 29(3), pages 731-756.
    17. Kristina Nyström, 2021. "Working for an entrepreneur: heaven or hell?," Small Business Economics, Springer, vol. 56(2), pages 919-931, February.
    18. Pawel Adrjan, 2018. "Risky Business? Earnings Prospects of Employees at Young Firms," Economics Series Working Papers 852, University of Oxford, Department of Economics.
    19. Francesco Manaresi & Carlo Menon & Pietro Santoleri, 2021. "Supporting innovative entrepreneurship: an evaluation of the Italian “Start-up Act” [The effects of entry on incumbent innovation and productivity]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(6), pages 1591-1614.
    20. Olav Sorenson & Michael S. Dahl & Rodrigo Canales & M. Diane Burton, 2021. "Do Startup Employees Earn More in the Long Run?," Organization Science, INFORMS, vol. 32(3), pages 587-604, May.

    More about this item

    Keywords

    Entrepreneurship; Hiring; Startups; Wage differential; Venture capital; Selection bias;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:respol:v:47:y:2018:i:3:p:637-649. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/respol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.