Reaching for the Stars: Who Pays for Talent in Innovative Industries?*


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     Thanks to George Baker, Tim Bresnahan, Charlie Brown, Ben Campbell, Robert Gibbons, Britta Glennon, Erica Groshen, Phil Hardiman, Edward Lazear, Alex Mas, Paul Oyer, Julie Wulf and seminar participants at Stanford University, Harvard University, MIT, University of Illinois, UC Berkeley, University of Michigan, University of Toronto, Yale University, Washington State University, UC Santa Barbara, NBER, and the Society of Labour Economics meetings, for their helpful comments. This document reports the results of research and analysis undertaken by the US Census Bureau staff. It has undergone a Census Bureau review more limited in scope than that given to official Census Bureau publications. This document is released to inform interested parties of research and to encourage discussion. This research is a part of the US Census Bureau's Longitudinal Employer-Household Dynamics Programme (LEHD), which is partially supported by the National Science Foundation Grants SES-9978093 and SES-0427889 to Cornell University (Cornell Institute for Social and Economic Research), the National Institute on Aging Grant R01 AG018854-02, and the Alfred P. Sloan Foundation. The views expressed on statistical issues are those of the author(s) and not necessarily those of the US Census Bureau, its programme sponsors or data providers. Some or all of the data used in this article are confidential data from the LEHD Programme. The US Census Bureau supports external researchers’ use of these data through the Research Data Centers (see For other questions regarding the data, contact US Census Bureau.


Innovative firms need to hire and motivate highly talented workers. This article connects the potential returns to innovation to the structure of compensation for skilled employees. We show that the software firms that operate in software sectors with high potential upside gains to innovation pay more to ‘star’ workers than do other firms that operate in stable markets. Firms operating in product domains with highly skewed positive returns pay employees more in up-front starting salaries and offer higher compensation growth. The large estimated effects on earnings are robust to the inclusion of a wide range of controls for worker and firm characteristics.