The struggle of small firms to retain high-skill workers: job duration and the importance of knowledge intensity

In the knowledge economy, skilled workers play an important role in innovation and economic growth. However, small firms may not be able to keep these workers. We study how the knowledge-skill complementarity relates to job duration in small and large firms, using a Portuguese linked employer-employee data set. We select workers displaced by firm closure and estimate a discrete-time hazard model with unobserved heterogeneity on the subsequent job relationship. To account for the initial sorting of displaced workers to firms, we introduce weights in the model according to the individual propensity of employment in a small firm. Our results show a lower premium on skills in terms of job duration for small firms. Furthermore, we find evidence of a strong knowledge-skill complementarity in large firms, where the accumulation of firm-specific human capital also plays a more important role in determining the hazard of job separation. For small firms, the complementarity does not translate into longer job duration, even for those with pay policies above the market. Overall, small knowledge-intensive firms struggle to retain high skill workers and find it harder to leverage the knowledge-skill complementarity. Plain English Summary Small knowledge firms are struggling 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 more technological, this knowledge-skill complementarity may be different for small and large firms. We study how the complementarity affects job duration, and how firm size influences this relationship. We find that skilled workers in large knowledge firms see a premium in terms of longer durations. In small knowledge firms skilled workers suffer a penalty instead. We also test how personnel management practices mediate these effects and find that even small knowledge firms paying higher wages find it hard to keep workers. Our study shows that small firms struggle to retain skilled workers, limiting their ability to handle knowledge. This calls for policy mechanisms to diminish barriers to knowledge, recognizing that human resources are the main assets of new ventures.