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Pay, Employment, and Dynamics of Young Firms

Institute Working Paper 21 | Published August 5, 2019

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Tania Babina Columbia University
Wenting Ma University of Massachusetts Amherst
Christian Moser Senior Research Economist
Paige Ouimet University of North Carolina at Chapel Hill
Rebecca Zarutskie Board of Governors of the Federal Reserve System
Pay, Employment, and Dynamics of Young Firms


Why do young firms pay less? Using confidential microdata from the US Census Bureau, we find lower earnings among workers at young firms. However, we argue that such measurement is likely subject to worker and firm selection. Exploiting the two-sided panel nature of the data to control for relevant dimensions of worker and firm heterogeneity, we uncover a positive and significant young-firm pay premium. Furthermore, we show that worker selection at firm birth is related to future firm dynamics, including survival and growth. We tie our empirical findings to a simple model of pay, employment, and dynamics of young firms.