Establishment age and wages

Abstract

This paper investigates the relationship between establishment age and wages. A key challenge is that new establishments differ from mature establishments along many dimensions due to non-random survival of establishments. Furthermore, worker composition changes as establishments age. To get around this, the paper uses linked employer–employee data from Germany and estimates the establishment age–wage relationship controlling for establishment and worker fixed effects and focuses on starting wages of workers. I show a striking pattern: starting wages in new establishments are 9 percent higher than in mature establishments (older than 20 years). I also report evidence that this difference is not driven by differences in hours, compensation for unemployment risk or slower future wage growth. Instead, I show that the difference is driven by, on average, high growth rates in new establishments as would be predicted by monopsonistic search models.