Do startups provide employment opportunities for ... startups, there is not much empirical evidence

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  • Do startups provide employment opportunities for disadvantaged workers?

    Daniel Fackler Institut für Wirtschaftsforschung Halle

    Michaela Fuchs IAB Sachsen-Anhalt-Thüringen

    Lisa Hölscher Institut für Wirtschaftsforschung Halle

    Claus Schnabel University of Erlangen-Nuremberg

    (June 2018)

    LASER Discussion Papers - Paper No. 108

    (edited by A. Abele-Brehm, R.T. Riphahn, K. Moser and C. Schnabel)

    Correspondence to:

    Claus Schnabel, Lange Gasse 20, 90020 Nuremberg, Germany, Email: claus.schnabel@wiso.uni-erlangen.de.

  • Abstract

    This paper analyzes whether startups offer job opportunities to workers potentially facing labor market problems. It compares the hiring patterns of startups and incumbents in the period 2003 to 2014 using administrative linked employer-employee data for Germany that allow to take the complete employment biographies of newly hired workers into account. The results indicate that young plants are more likely than incumbents to hire older and foreign applicants as well as workers who have instable employment biographies, come from unemployment or outside the labor force, or were affected by a plant closure. However, an analysis of entry wages reveals that disadvantageous worker characteristics come along with higher wage penalties in startups than in incumbents. Therefore, even if startups provide employment opportunities for certain groups of disadvantaged workers, the quality of these jobs in terms of initial remuneration seems to be low.

    Zusammenfassung

    Die Studie analysiert, ob neu gegründete Betriebe Beschäftigungsmöglichkeiten für solche Arbeitnehmer bieten, die zu den Problemgruppen des Arbeitsmarktes zählen. Unter Verwendung administrativer, verbundener Arbeitgeber-Arbeitnehmer-Daten für Deutschland, die eine Berücksichtigung der gesamten Erwerbsbiografien von neu eingestellten Arbeitnehmern ermöglichen, vergleicht sie die Einstellungsmuster von neu gegründeten und etablierten Betrieben im Zeitraum 2003-2014. Es zeigt sich, dass junge Betriebe tatsächlich mit einer höheren Wahrscheinlichkeit als etablierte Betriebe ältere und ausländische Arbeitnehmer sowie solche mit instabilen Erwerbsbiografien einstellen. Gleiches gilt für Bewerber, die aus Arbeitslosigkeit oder von außerhalb des Arbeitsmarktes kommen oder die Opfer einer Betriebsschließung wurden. Allerdings deutet eine Analyse der Einstiegslöhne darauf hin, dass die Merkmale dieser benachteiligten Arbeitnehmer in neu gegründeten Betrieben mit höheren Lohnabschlägen einhergehen als in etablierten Betrieben. Auch wenn Neugründungen damit Beschäftigungsmöglichkeiten für bestimmte Gruppen benachteiligter Arbeitnehmer bieten, scheint die Qualität dieser Jobs � gemessen an der anfänglichen Entlohnung � gering zu sein.

    Author note

    We would like to thank Udo Brixy and Steffen Müller, seminar participants at the Halle Institute for Economic Research (IWH), the Otto von Guericke University Magdeburg, and the Colloquium on Personnel Economics (COPE) 2018 in Munich for helpful comments and suggestions.

  • 1. INTRODUCTION

    In political debates, startups are often regarded as important drivers of structural change and

    technological progress and they are ascribed a crucial role for job creation, thereby helping

    to reduce unemployment. It is thus not surprising that a broad literature has dealt with newly

    founded firms, their performance and their contribution to job creation and destruction.1

    What is surprising, however, is that there is not much empirical evidence on the actual hiring

    behavior of newly founded firms. This research deficit is particularly grave because the

    relevance of startups and their direct contribution to overcoming employment problems will

    be larger if they disproportionally hire workers who are currently not employed, who have

    difficulties finding jobs in mature firms or who lost their jobs in the course of reallocation

    and structural change (e.g., due to plant closures). Even if the jobs in startups are less stable

    than those in incumbent firms, they may still help to preserve workers’ labor market

    attachment, prevent human capital depreciations coming along with longer periods of

    unemployment, and make it easier for work seekers to re-enter the labor market. In contrast,

    if startups just poach workers from incumbent firms, they mainly contribute to labor market

    turnover. In this case, it is questionable whether their direct contribution to overcoming

    employment problems of certain groups of workers is substantial enough to warrant the

    strong political attention and support startups currently receive.

    Against this background, the primary objective of this paper is to analyze empirically

    whether startups are more likely than incumbent firms to provide employment opportunities

    for so-called “disadvantaged” workers facing serious labor market problems – in particular

    older workers, foreigners, low-qualified individuals, persons with unstable employment

    biographies, in (long-term) unemployment or outside the labor force, as well as first-time

    entrants into the labor market and workers who have become victims of plant closures.

    Startups may offer such workers a riskier and probably lower-paying alternative when being

    shut out of jobs at mature firms (an alternative that is still better than being unemployed),

    but in their critical early phase, these newly founded firms could also be reluctant to recruit

    individuals with obvious deficiencies. If startups are found to be more likely to provide

    employment opportunities for disadvantaged workers, this implies that they are not only

    beneficial for an economy by fostering growth and competition, but also that the jobs created

    by them are valuable from a socio-political point of view.2 We add to the literature not only

    1 Surveys of the literature on newly founded firms are provided by Geroski (1995), Wagner (2006)

    or Santarelli and Vivarelli (2007).

    2 Our analysis focuses on whether startups themselves directly contribute to overcoming

    employment problems by hiring disadvantaged workers. We are aware that even if startups are

    poaching workers with more desirable characteristics from established firms, this might lead to a

    redeployment process in which these vacant positions in incumbents could be filled with

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    by focusing on workers with labor market problems but also by making use of more detailed

    information about workers’ employment biographies than previous studies as we have access

    to high-quality linked employer-employee data for (West) Germany reaching back to 1975.

    Beyond the analysis of job opportunities for disadvantaged workers, we additionally address

    the quality of these jobs by investigating whether the above-mentioned worker

    characteristics come along with wage penalties and whether these penalties are higher in

    young or incumbent firms. If they are lower in young firms, for instance because startups

    are not willing or able to discriminate against certain types of workers or assess these

    workers’ human capital differently than incumbent firms, startups provide an additional

    pecuniary benefit for disadvantaged workers. In contrast, it could also be argued that it is

    incumbents that have less scope for discrimination than startups due to wage setting

    institutions like collective agreements and works councils. To the best of our knowledge, we

    are the first to analyze wage differentials between startups and incumbents specifically for

    disadvantaged groups of workers.

    2. EMPLOYMENT, HIRING BEHAVIOR, AND WAGES IN STARTUPS

    Many studies have shown that young firms’ contribution to gross and net job creation is

    substantial (see, e.g., Haltiwanger, Jarmin, and Miranda 2013 for the US; Fuchs and Weyh

    2010 for Germany). At the same time, young firms also contribute disproportionately to job

    destruction, in particular because of their high exit rates (e.g., Fackler, Schnabel, and Wagner

    2013). Using data for Germany, Fritsch and Weyh (2006) demonstrate that the total number

    of jobs in a startup cohort first increases but then falls below its initial level after a couple of

    years, mainly because many of these startups exit the market.3 Some authors therefore

    question whether startups really play an important role for sustainable job creation (e.g.,

    Santarelli and Vivarelli 2007; Shane 2009).

    Despite this growing and controversial literature on the overall employment effects of

    startups, there is not much empirical evidence on the actual hiring behavior of newly founded

    firms, as observed by Fairlie and Miranda (2017, p. 3): “Job creation is one of the most

    important aspects of entrepreneurship, but we know relatively little about the hiring patterns

    disadvantaged individuals. Analyzing these dynamics in detail is however beyond the scope of

    our study.

    3 In addition to these direct employment effects, indirect effects might emerge from the increased

    competitive pressure exerted by startups, which induces incumbents to react, thereby fostering

    economic growth. Fritsch and Noseleit (2013), for example, find for Germany that this indirect

    employment effect of startups is substantial, too.

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