• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar

IZA Newsroom

IZA – Institute of Labor Economics

  • Home
  • Archive
  • Press Lounge
  • DE
  • EN
ResearchFebruary 21, 2020

How cash windfalls affect wages

Small high-tech firms use government R&D grants to raise incumbent workers’ earnings

© iStockphoto.com/Photobuay

Do firms use an unexpected cash flow to spend the extra money on dividends (i.e. transfer it to owners or shareholders), wages, or investment in physical or human capital (i.e. new hires)? This question is not easy to answer because rents are usually associated with productivity growth. To observe the wage effects of pure rent-sharing, one would ideally need an experiment that randomly assigns cash to firms.

To approximate such an obviously quite unrealistic experiment, a new IZA paper by Sabrina T. Howell and J. David Brown evaluates the effects of a government R&D grant program on employee earnings by comparing grant awardees with unsuccessful applicants. The grant can be considered a cash flow shock because there are no restrictions on how it is spent.

The authors use data from applications to Small Business Innovation Research (SBIR) grants awarded by the U.S. Department of Energy between 1995 and 2013. They concentrate on small, likely financially constrained firms in the high-tech sector, which are crucial to economic growth and have especially dynamic employment and wage structures.

Backloaded wage contracts

The analysis shows that incumbent employees, hired before the application year, receive a 16 percent increase, which is consistent across the wage distribution. The wage effect increases with worker tenure, by 1.2 percent for each additional year on the firm’s payroll. New employees, hired in or after the year of the award, do not benefit at all. This leads to higher wage inequality between incumbents and new hires.

The grant also increases employment and revenue. Productivity growth, however, cannot not fully explain the wage effects. Instead, the data and a grantee survey suggest a frequent use of “backloaded” wage contracts, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available.

The authors point out that large, unconstrained firms are likely to react quite differently to a cash windfall than the smaller firms in their data, which tend to have less hierarchical structures, more employee autonomy, and more opportunity for monitoring and coordination.

Featured Paper:

IZA Discussion Paper No. 12942 Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms Sabrina T. Howell, J. David Brown

Share this article

Share on Twitter Share on Facebook Share on LinkedIn Share via e-mail
  • cash flow
  • earnings
  • employees
  • grant
  • innovation
  • rent-sharing
  • wages
  • J. David Brown
  • Sabrina T. Howell
Previous Post
Shuffle
Next Post

Reader Interactions

Primary Sidebar

COVID-19 and the Labor Market

covid-19.iza.org

Recent Posts

  • January 23, 2023

    Does immigration undermine social cohesion in the receiving country?
  • December 19, 2022

    Immigration or automation?
  • November 16, 2022

    Skilled immigration spurs innovation

Related Content

  • April 18, 2019

    Firms owned by immigrant entrepreneurs innovate more
  • March 29, 2016

    Turning unemployed into self-employed can be an effective alternative to traditional labor market policies
  • June 3, 2016

    How to promote entrepreneurship
  • 
  • 
  • Archive
  • 
  • Research
  • 
  • How cash windfalls affect wages

© 2013–2023 Deutsche Post STIFTUNGImprint | Privacy PolicyIZA