Talent Market Competition and Firm Growth

Abstract

How does competition for talent affect firm growth? Combining establishment-level occupational employment microdata with job posting data, we construct a novel measure of firms' talent retention pressure (TRP) based on their talent's outside options stemming from local talent market competition. We validate our measure by showing it captures CFOs' subjective talent retention concerns and predicts firms' talent outflows. We find that (i) TRP significantly dampens firms' capital investment with a magnitude parallel Tobin's Q---an effect which we further reinforce using an instrumental variable; (ii) when facing increased TRP, firms on average do not elastically retain talent in terms of improving compensation and satisfaction but instead post more jobs for talent, resulting in lower subsequent talent productivity; (iii) TRP dampens primarily laggard firms' growth but not the large superstar firms', partly due to superstar firms' elastic retention efforts; and (iv) rising TRP leads to limited impact on aggregate U.S. investment but increased industry concentration.

Keywords: talent market competition, talent retention, corporate investment, on-the-job search model, investment-Q gap, industry concentration

JEL Classification: G3, J6