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Reaching for the Stars: Who Pays for Talent in Innovative Industries?

Author

Listed:
  • Fredrik Andersson
  • Matthew Freedman
  • John C. Haltiwanger
  • Julia Lane
  • Kathryn L. Shaw

Abstract

Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front--in starting salaries--to attract and motivate star employees, because if these star workers produce home-run innovations, the firm's winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs.

Suggested Citation

  • Fredrik Andersson & Matthew Freedman & John C. Haltiwanger & Julia Lane & Kathryn L. Shaw, 2006. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," NBER Working Papers 12435, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12435 Note: EFG LS PR
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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