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Job Hopping Is Down and the Wage Gap Is Up Between Young and Old Companies

11/28/2012 05:01 pm ET | Updated Jan 28, 2013

As the labor market begins to recover and loosen up, job applicants will naturally have more options of potential employers, along with the task of weighing the tradeoffs of working at different firms. Among the broader choices prospective employees will grapple with is a simple decision with far-reaching consequences -- whether to sign on at a large, established firm or to look for work at a startup instead. Fortunately, some of the distinctions between these two disparate employment options are starting to come into sharper focus. The newly released census brief, "Business Dynamics Statistics Briefing: Job Creation, Worker Churning, and Wages at Young Businesses," helps answer some initial questions about the differences between young, small firms and more mature, larger companies, and highlights the introduction of new census data that is likely to provide even more answers to job hunters in the near future.

As far as the study itself, the authors found both long-term trends and more immediately resonant results. Over the past decade, the data make it clear that worker churning (i.e., job switching) has decreased among firms of all sizes and ages. Since voluntary job switching is usually the result of an employee seizing a better-matched job, worker churn is essential to the growth of one's lifetime earnings, and in turn, the long-term health of the economy. The authors suspect that the decrease in churn is reflective of increasingly cautious employees and employers, and are concerned with the potential resultant effects on earnings.

Another possible reason for reduced job churn, however, is that the economy is simply getting better at finding early-career matches for prospective employees. Such an explanation also would alleviate concerns over the potential for reduced lifetime earnings -- if workers are finding their better-matched jobs earlier in their careers, then worker churn becomes decreasingly important to the growth of lifetime earnings (and as an indicator of overall economic health). Because this alternative hypothesis casts doubt on our current certitude of churning's benefits, the potential for such a disruption merits further investigation.

The other long-term trend that the paper identifies is the increasing firm age wage premium, or the gap in earnings between employees at young firms and those at older firms (who get paid more). Smartly, the authors account for shifts in industry composition over the time period, as the makeup of startup companies has shifted toward lower-wage sectors. Even with this factor controlled for, however, we still see the wage differential between lower-paying new firms and higher-paying old firms widening over time -- a discouraging trend on its surface.

However, two reasonable and heartening explanations exist for the increasing gap. The first is that we might also correct for geography if we believe that startups are springing up at higher rates in cities with a lower cost of living. This explanation finds purchase in light of arguments set forth by Ryan Avent in his recent short book, The Gated City, and Matthew Yglesias in The Rent is Too Damn High, both of which contend that our most productive cities are increasingly becoming prohibitively expensive places to live. Since a dollar goes farther in Kansas City than it does in San Francisco, firms which locate in the former metro can pay their employees lower wages for the same work. Accordingly, an increasing proportion of young firms in KC would bring down the national average wage among all young firms and thus widen the wage premium gap.

The other possible explanation lies with the nature of the data itself. Simply, these data only reflect direct-value wages and do not account for equity, its expected value, or the non-economic rewards of a job (i.e., the satisfaction of feeling like a crucial part of a small operation). Thus, the widening gap could be accounted for equally well by the authors' expectation that young companies are increasingly unable to keep wages competitive with larger, older firms, or the gap could be a result of either an increasing prevalence of equity options or a shift in culture that places more weight on independence for job satisfaction. More likely than any single answer though, the growing wage gap is probably some mixture of the authors' viewpoint, the alternatives I've suggested and some other trends that neither of us have even yet considered.

In contrast to the ambiguous news about small firms, the paper also points to the encouraging new finding that small and especially young firms have done a better job of recovering from recessions. Both after the crash in 2001 and 2008, small and young firms handily beat their larger and older counterparts in a recovery of worker churning. While no cohort reached the peak they left prior to a recession, it is clear that younger firms are more agile in their ability to regain balance quickly following national economic turbulence.

Although the picture is far from complete, the brief's various findings highlight the potential explanatory power of the new data introduced to the Census' Quarterly Workforce Indicators (QWI). There are clear tradeoffs to be made for a prospective employee choosing between small, young firms and older, larger firms, and this brief is a step in the right direction for understanding and weighing those differences. With the introduction of firm age and size to the data set, researchers now have an entirely new facet of the QWI to explore, and it's therefore only a matter of a time before the investment in better data hits pay dirt and job hunters can turn the academic work into an applicable tool in their search for the best individual employment match.