Is there a startup wage premium? Evidence from MIT graduates

• Published in: Research policy 2018-04, Vol.47 (3), p.637-649
• Main Author: Kim, J. Daniel
• Format: Article
• Language: English
• Subjects: Entrepreneurship; Hiring; Selection bias; Startups; Venture capital; Wage differential
• ISSN: 0048-7333; 1873-7625
• DOI: 10.1016/j.respol.2018.01.010

•Top college graduates are increasingly joining VC-backed startups upon graduation.•Employees at VC-backed startups earn 10% more than those at established firms.•Startup wage premium is driven by systematic sorting of high-ability graduates.•Job preferences strongly predict selection into startup vs. established firm. 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.