Entrepreneurship, Human Capital and Labor Demand: A Story of Signaling and Matching

In contrast to employee qualifications, there is no clear evidence that entrepreneurs' qualifications positively affect their income. In this study we propose that entrepreneurs can benefit from using their qualification as a signal during the process of recruiting employees. This is assumed to follow a process of matching equals among equals. We confirm a matching of qualification levels for highly skilled employees in Denmark, and an indication of this in Germany. Partial support for matching among medium-skilled employees was only found in Germany, with no consistent evidence of matching for low-skilled employees in neither country. This suggests that as skill levels of employees decrease, their probabilities of working for different founders converge. Founders' qualifications are the most reliable predictor of recruitment choices over time. Our findings are robust to numerous control variables as well as across industries and firm age.