New Homebase research reveals the smallest business’ biggest hiring advantage

Summary: Consistent with economic research, the largest companies using Homebase hiring software post jobs with the highest target hourly wages. Surprisingly, however, I find that some of the smallest companies using Homebase hiring software — those with just one to four employees —  are willing to pay as much as 10% higher than those with 20-49 employees, giving them a newfound competitive edge in a challenging market for talent. 

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Hiring is top of mind these days, as businesses of all sizes continue to compete for workers in a tight labor market. And, given that one of the most consistent findings in labor economics is the fact that larger companies pay higher wages than smaller companies, you’d expect the biggest employers to have little competition in terms of pay. 

Interestingly, in my own recent research into Homebase hiring data, I’m finding a surprising result: Companies with one to four employees are willing to pay prospective employees 10% more than companies with 20-49 employees — making these businesses worthy competitors. 

Source: Homebase hiring data (January 2021 – March 2022). Note: Results from regression predicting Ln (target hourly wage) as a function of total number of employees, state, month, year, month*year, specific business description (e.g., grocery store, pet store, consulting) and select job roles (e.g., chef, baker). Controlling for NAICS codes or coarse business descriptions yield comparable results; controlling for MSA, city or zip code as opposed to state yields consistent results, as does estimating models without controls. Treating business employee size as a continuous variable with a squared-term yields consistent conclusions. Robust, clustered (by establishment standard error bars. Model F=32.77***, R2 =0.22. All total number of employee indicator variables are statistically significant at p < .05 (two-tailed tests) save for the 100 to 249 indicator variable.

How can the smallest companies offer a higher wage?

One explanation is that the smallest companies generate, on a size-adjusted basis, sufficient revenue to warrant a target wage premium. Looking into sales data for a selected sub-sample of Homebase customers, I can predict the ratio of a company’s monthly revenue to total number of employees — and find that the smallest companies enjoy a productivity advantage. They earn approximately $4,500 more per month per employee than companies with 20 to 49 employees (the baseline category for comparison). Whereas, the largest companies in the Homebase sample have the lowest sales to employee ratio.  

Source: Homebase hiring data (January 2021 – March 2022). Note: Results adjust for state, month, year, zip code and NAICS code. Treating business employee size as a continuous variable with a squared-term yields consistent conclusions, as does estimating a fractional logit model. Robust, clustered (by establishment standard error bars. Model F=45.25***, R2 =0.79. All total number of employee indicator variables are statistically significant at p < .05 (two-tailed tests) save for the 10 to 19 indicator variable. Excluding from analysis the companies with the greatest sales (e.g., 75th percentile or above) does not change results, nor does controlling for state or MSA as opposed to zip code. Largest firm category omitted due to sub-sample size considerations. 

Do all of the smallest companies offer a higher wage?

My analysis accounts for a host of factors that can explain a higher target wage, including job location, industry, and seasonality. However, there are instances where the smallest companies offer lower target wages than companies with 20 to 49 employees:

• Food & drink: The smallest companies in this category pay approximately 4% less.
• Roles with a target wage of $15 or less: The smallest companies in this category offer a wage deficit of approximately 3.9%.

Operational considerations

Researchers often define and measure “large” companies as those with greater than 10,000 workers, and “small” companies as those with 100 or fewer. However, there are considerable operational differences between companies with one to four employees and those with 20, 60, or 100 employees. 

Large businesses are often bureaucratic, formal, rigid, and standardized. They tend to be powerful and prestigious, and they have advantages that help them make organizing and operating more efficient and economical. Annual rankings of the best companies to work for are, without fail, lists of some of the largest companies in the country. So, not surprisingly, many of those ranked are also the companies new college graduates aspire and apply to work for.

The smallest businesses are often more collegial, familial, flexible, and authentic. These businesses were responsible for 16.2% of gross job gains in the United States in the second quarter of 2022 — and approximately 64% of job gains at all new firms (as most businesses start out small). On the other hand, most job losses at companies that are closing occur in the smallest of companies. 

For many of these very small companies, a job posting using Homebase hiring might be the first hire they make—or the first hire outside of the original circle of “friends and family” involved in the business. Furthermore, the very fact a company is hiring suggests that the company has (projected) demand for its products or services at a level the current employee base cannot comfortably meet. Such growing companies may not be typical of all very small businesses. 

Conclusion

Hiring is hard even in the best of times. But in a hot labor market like the US is currently experiencing, hiring can be frustrating and fruitless for all employers — especially, the smallest. Small companies do not have the same brand equity as large companies, which means they often must expend more time, effort, and money reaching — and then educating and convincing — prospective employees their small (but mighty!) businesses are a good place to work.

A higher target wage — made possible by a productivity edge — may put many of the smallest businesses in a better position to compete with larger employers for hourly workers. Of course, it’s important to also consider that employees’ needs and desires in work and a workplace are changing. As pay is only one factor candidates consider when comparing and evaluating competing offers, employers of all sizes must keep abreast of their evolving preferences to compete to attract — and even retain — today’s employees. 

Methodology: 

Using Homebase hiring data, thousands of job posts from January 2021 – March 2022 were analyzed. These job posts are primarily for hourly work. Homebase hiring data offer an important analytical advantage as a high proportion of the job posts include the “target wage” offered for a specific job and period of time. (This allows for a cleaner assessment of how companies of varied sizes set wages without the confusion and confounding that can occur when a researcher can only observe accepted wages.) Analyses based on accepted wages can obscure the fact that job candidates with different preferences are attracted to different types (and sizes) of companies. Additionally, accepted wages can result from a negotiation between the job seeker and employer. Stronger candidates—and especially those with competing offers—will generally accept higher wages, all else equal. Focusing on the target wage set by a hiring employer before any possible negotiations is not subject to these same analytical complications.

Wage analysis: Target wage analysis accounts for location, year, month, year and month, industry, and most frequent job roles. Location was measured in several separate ways (e.g., state, MSA, city, zip code), and industry was measured at various levels of detail (e.g., NAICS code, coarse categories, specific categories (i.e., “sit-down restaurant”). Results remained consistent regardless of factors: Companies with the smallest (1-4) total number of employees were willing to pay prospective employees higher wages. For the smallest companies, the target wage premium was 10% more than companies with 20-49 total employees (the reference category). The smallest company wage premium was approximately 12.7% in the home and repair category. 

Robustness test: To ensure that employers in certain industries/roles that tend to organize and operate in smaller organizations were not skewing the results, job posts with hourly target wages greater than $30 were omitted. With this restriction, the size of the smallest organization wage premium remained large (approximately 6.4%) and highly statistically significant. (The largest firm wage premium is approximately 14.4% excluding these highest paying jobs.) Job posts with custom descriptions (one way of measuring “unusual cases”) offered target wage premiums of approximately 6% v. standardized roles, all else equal. This did not, however, explain the smallest company wage premium.