Labour markets across developed economies face a persistent challenge: how to create not just more jobs, but better and fairer employment opportunities. Women still face wage gaps and concerns about job security remain widespread.
A business environment that makes it easier for young firms - those that are younger than five years, typically start-ups and small businesses - to enter the market and operate could help address these challenges. Recent OECD research using data from France and Portugal shows that, once similar workers are compared, young firms do not pay less or offer less secure contracts. They also contribute to inclusiveness by reducing the gender wage gap and hiring foreign-born workers, while playing a vital role in job creation and innovation.
Young firms do not pay less than older firms when similar workers are compared
The data show that although young firms appear to pay lower wages on average, this gap disappears – and even reverses – once differences in worker and firm characteristics are taken into account. Young firms tend to hire younger and less experienced workers, which naturally lowers their average wage levels. But when comparing workers of similar age, tenure and experience, young firms paid between 0.4% and 0.8% more than older firms.
This wage premium may reflect the need for these young companies to compete for talent despite higher business risk and less diverse career opportunities. Paying a wage premium could be one way to attract employees in the face of this uncertainty. This suggests that policies fostering entrepreneurship don't come at the expense of worker pay, and may even help lift it.
Young firms also tend to offer more secure contracts once similar workers are compared
Although young firms face higher rates of business failure, they tend to compensate by offering more stable contract terms. Once similar workers are compared, young firms display a higher propensity to employ on open-ended rather than fixed-term contracts than older companies.
In France, when controlling for worker characteristics and industry differences, young firms were 3.7 percentage points more likely to offer permanent contracts, while in Portugal this figure was 4.3 percentage points.
This has significant implications for policy. Open-ended contracts provide workers with greater legal protections, access to benefits, and career stability – suggesting that young firms appear to actively offset business uncertainty through contract security.
Wage gaps between women and men tend to be smaller in young firms
While France and Portugal have different workforce compositions and institutional contexts, wage gaps between women and men tend to be consistently lower in young firms across both countries. Even when taking into account factors such as the age, experience and background of workers, as well as the type of company, these differences remain. When controlling for these factors, women working in young firms had their wage gap with men reduced by 0.3 to 0.7 percentage points.
This suggests that even if young firms do not seem to employ more women, they can play a relevant role for pay equity among workers of different sex. For policymakers working on gender equality initiatives, fostering business dynamism appears to complement rather than compete with gender equity goals.
Looking ahead: what can policymakers do?
Reinforcing the foundations of a dynamic business environment doesn’t just boost entrepreneurship, productivity, and growth, it can also lead to better pay and more secure contracts for workers.
Focusing on the policy areas below, while continuing to promote inclusive labour markets, could therefore bring double dividends for jobs and growth.
- Strengthen skills and entrepreneurial potential by improving education at all levels, supporting entrepreneurship training, and encouraging collaboration between universities and industry.
- Reduce barriers for start-ups by making it easier to access finance (including seed and early-stage capital).
- Create a business-friendly environment by limiting the burden that disproportionately weighs on the youngest/smallest firms. This can be done by streamlining administrative procedures, reducing regulatory burdens, fostering competition, and ensuring efficient contract enforcement and bankruptcy processes.
Those looking for further practical guidance on how to design such measures can explore our blog post on how policymakers can better support start-ups, which sets out actionable options for policymakers aiming to strengthen entrepreneurial ecosystems and maximise the benefits young firms bring to workers and the wider economy.