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Assistant finance professor Linghang Zeng noticed a few years ago just how much computer programmers seemed to be getting paid.

“The salaries in IT went up quite dramatically in the last decade or two,” Zeng observed. “When programmers go out to find jobs, they are typically going to have multiple offers. Naturally, they ask those organizations to compete on pay.”

The modern economy needs more tech workers, yes, but it’s not frenetic Cisco-versus-IBM bidding wars for fresh CalTech grads that’s driving up labor prices, Zeng said.

Venture capital plays a major role.

Zeng, a Babson College assistant finance professor in Boston, recently published a study analyzing VC funding’s effect on labor competition.

Plenty of attention — popular, professional, and academic — goes to parsing product competition: How much better is an Uber ride than a yellow cab? What’s the value of a prechopped Blue Apron delivery over supermarket offerings? But labor is the primary asset of those companies in the modern economy, Zeng pointed out to Institutional Investor in a Tuesday interview.

Poaching the best talent and driving up the cost of that input is a competitive play itself. Those top-notch workers in turn produce better products.

And venture capital is paying for the poaching.

“VC-backed startups appear to be competitive in competition for talent,” Zeng wrote in the paper. Using a sample of MIT graduates, another cited researcher found that 14 percent joined VC-backed startups in 2014 and that VC-backed startups pay a roughly 10 percent wage premium compared to incumbent firms.

For the established industry players, “the direct impact is that they have to increase their wage compensation to keep their talent,” Zeng told II. “Another possible thing — and I have some suggestive evidence to support this — is that incumbent firms are not going to compete in the areas that prices are just too high.”

The grown-up multinationals may use that scale to their advantage, hiring programmers, for example, in less expensive labor markets while their VC-backed aspirants have just Silicon Valley or Boston or New York to fish from.

The remote-work revolution brought on by Covid-19 opens compelling new avenues for research, Zeng said.

“Companies are realizing, ‘OK, we can hire remote skilled workers,’” he said. Labor mobility among white-collar workers may go from an illusion to reality. “Also, is there any long-run consequence to remote labor? When people are in the same place, they can exchange ideas. How will it affect innovation in the long run?”

As for wages in this new outsourced-anywhere world, Zeng wasn’t worried. “Highly skilled workers always command a premium.”

 

Source: Venture Capital Makes Talent Unaffordable for Start Ups’ Competitors | Institutional Investor