The struggle of small firms to retain high-skill workers

July 18, 2022

Small knowledge firms struggle to keep their best employees: highly-skilled workers are needed for growth and success, but small firms cannot hold onto them. Advanced knowledge increases the productivity of skilled workers. Because large firms are more innovative and technological, this knowledge-skill complementarity may be different for small and large firms.

This paper applies discrete-time proportional hazards models with unobserved heterogeneity for several worker skill measures and human capital accumulation, interacted with firm-size categories and industry knowledge-intensity to ascertain how knowledge-skill complementarities are influenced by firm size. The paper uses the detailed linked employer-employee data set Quadros de Pessoal that originates from a mandatory survey collected by the Portuguese Ministry of Employment.

The paper finds that skilled (both in terms of education and firm-specific skills) workers in large knowledge firms receive a premium in terms of longer employment durations. In small knowledge firms, skilled workers suffer a penalty instead. The returns to education in less knowledge-intensive firms do not seem to differ with firm size.

The paper also tests how personnel management practices mediate these effects and finds that even small knowledge firms paying higher wages find it hard to keep workers (see figure). The figure shows that firms in the 4th quartile systematically pay above-market wages even after controlling for observable worker and firm characteristics.

Effect of human resource management practices on the probability of job separation.
Caption: Effect of human resource management practices on the probability of job separation.

The study shows that small firms struggle to retain skilled workers, limiting their ability to handle knowledge. Even small knowledge-intensive firms with better human resource practices see no unique advantage in retention compared to larger firms or small less knowledge-intensive firms. There is a skill gap between small and large knowledge-intensive firms, which could lead to ever-expanding large firms and dwindling small firms who cannot maintain or grow their ranks of skilled workers necessary for greater innovation, technology adoption and knowledge production. The analysis suggests that policy should promote mechanisms to diminish barriers to knowledge, recognizing that human resources are the main assets of new ventures.

Click here to go to the paper by Hugo Castro-Silva and Francisco Lima.


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