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New firms and labor market entrants: Is there a wage penalty for employment in new firms?

Abstract

In this paper, we explore the role of new firms as an entry point to the labor market. Because the vast majority of new firms are short-lived, it is a risky decision to accept employment in a new venture. It can be argued that individuals with little (or no) labor market experience are more willing to accept the high risks associated with employment in new firms. Hence, new firms may work as an entry point to the labor market. Nevertheless, some research concludes that one disadvantage of employment in a new firm is that new firms pay less (Shane in Small Bus Econ 33:141–149, 2009). However, this empirical conclusion is primarily based on literature on the wage penalty of small firms. In this paper, we study whether the wage penalty of employment in a new firm persists if we focus solely on labor market entrants. In the empirical analysis, we employ an employer-employee matched dataset that covers the Swedish population during the period from 1998 to 2008. We use the propensity score matching method to study the wage differences between labor market entrants employed in new and incumbent firms. We find an average wage penalty of 2.9 % for labor market entrants employed in new firms over the studied period.

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Notes

  1. 1.

    However, as noted by van Praag and Versloot (2007), there may be other non-pecuniary benefits associated with entrepreneurship. We may hypothesize, for example, that it may be attractive and interesting to participate as an employee in a new venture in developing a new business idea and building a new company.

  2. 2.

    For 2008, the minimum wage in our analysis is SEK 142,806, while the minimum wage calculated according to Skans et al. (2006) is SEK 142,250.

  3. 3.

    See Caliendo and Kopeinig (2008) for a detailed summary of the matching methods.

  4. 4.

    Note that this assumption excludes the possibility of including firm characteristics associated with employment in new or incumbent firms as explanatory variables.

  5. 5.

    We define a person with an immigrant background as a person who is foreign-born or is domestically born and has two foreign-born parents.

  6. 6.

    Grade point average.

  7. 7.

    Educational field includes secondary, post-secondary and graduate education; this variable is not strongly correlated with the other education variables.

  8. 8.

    Sweden consists of 289 municipalities and 72 local labor market regions. Local labor market regions are defined based on commuting patterns between municipalities.

  9. 9.

    The estimates for each individual year are available from the authors upon request.

  10. 10.

    The estimates for each individual year are similar and available from the authors upon request.

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Correspondence to Kristina Nyström.

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Nyström, K., Elvung, G.Z. New firms and labor market entrants: Is there a wage penalty for employment in new firms?. Small Bus Econ 43, 399–410 (2014). https://doi.org/10.1007/s11187-014-9552-x

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Keywords

  • New firms
  • Labor market entrants
  • Wage penalty
  • Propensity score matching
  • Average treatment effect

JEL classifications

  • C21
  • J21
  • J31
  • L26
  • M13