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Big firms pay 50 percent higher wages than small businesses, study shows

Small business owners are finding it increasingly difficult to match the wages offered by their larger competitors, according to new research, which could make it harder to find and retain talent on Main Street.

A new Kauffman Foundation study shows that small businesses have historically paid workers significantly less than large firms, with small firms closing the gap to its slimmest margin in 2001, when their employees earned on average 78 percent of the salaries paid to workers at large firms. But the gap has been growing steadily ever since, and by 2011, that figure dropped to 66 percent.

Over the same period, a similar trend was reported between young and old companies, as the percentage earned by employees of start-ups compared to those of established companies dipped from 85 percent to 70 percent.

That the gaps exist isn’t alarming, one expert explained, as small and young firms simply have smaller pools of capital from which to pay employees. But the rate at which their compensation levels are falling further behind has some worried that small businesses may lose more talented job applicants and employees to their larger, higher-paying counterparts.

“There is some evidence that small and young firms have a hiring advantage in recessions and early stages of expansion because the unemployed will take lower wages,” said Dane Stangler, Kauffman’s Director of Research and Policy, noting the findings may partly be attributed to the state of the economy over the past decade. “However, if the trends highlighted in today's Kauffman report are partly the result of policy barriers...then they will definitely affect the ability of smaller and younger companies to hire.”

The research draws from analysis of the U.S. Census Bureau’s Quarterly Workforce Indicators, which compile federal and state government data on employers and employees and only recently began including company size and age information. Researchers found that employee turnover slows down considerably as businesses get older and bigger, which could be contributing to the wage phenomenon.

 “There’s very high turnover at these small and young companies, and they are probably not drawing on as many older, high-educated applicants for their open positions,” Stangler said. “So my guess is that this is also related to the wage premium for college graduates.”

The widening of the big-small and new-old wage gaps is also partly the result of recent market shifts that have left a higher number of start-ups and small businesses in industries that typically pay lower wages. Stangler noted that the housing bubble, which burst right in the middle of the decade examined in the report, spawned a number of small construction and real-estate companies, which generally pay less than other industries.

He added that, especially for new companies with high-growth potential, wages aren’t always the primary tool used to lure talented employees.

“The wage comparison excludes a lot of the reasons people join start-ups,” he said. “For example, in tech companies, you have employees taking equity and betting on a payoff down the road and perhaps forgoing a lot of salary. Others want to work for themselves or like a small business environment, so there can be non-financial reasons behind the decision to work for these companies.”

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.



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