Creative Destruction? Local Business Conditions, Firm Age, and Wages.

Abstract

While a growing literature has examined the relationship between economic shocks and job creation in startups and established firms, little is known about the quality of these jobs. In this paper, I examine how fluctuations in local business conditions affect the wages of employees at startups and incumbent firms. I identify shocks to local business conditions using plausibly exogenous variation of hurricane strikes in U.S. coastal counties. I find that wages of startup employees increase substantially in response to negative shocks to local business conditions, while there is only a small raise in old firms. This effect does not appear to be driven by changes in supply or demand for labor. These findings are consistent with “cleansing” theories of downturns