VERY PRELIMINARY Talent Sorting and Skill Complementarity Among Software Engineers

Conventional wisdom in Silicon Valley suggests that firms need to have some top talent on hand in order to recruit additional top talent. This may be because skilled engineers and other professionals want to work with other top performers and/or because firms can gain from complementarities in production among these employees. We analyze this notion empirically using longitudinal matched employer-employee data on software firms. After decomposing wages into an employee “talent” measure and a firm “quality” measure, we find strong relationships between existing talent, newly hired talent, and firm quality. Firms whose workers exhibit greater talent are able to hire more workers with greater talent. Firms that pay well, controlling for the talent of their workers, are also able to attract relatively talented workers. This suggests that, at least within the software industry, firms are largely segregated according to the skill of their employees. This document reports the results of research and analysis undertaken in part by the U.S. Census Bureau staff. It has undergone a Census Bureau review more limited in scope than that given to official Census Bureau publications. This document is released to inform interested parties of ongoing research and to encourage discussion of work in progress. This research is a part of the U.S. Census Bureau's Longitudinal Employer-Household Dynamics Program (LEHD), which is partially supported by the National Science Foundation Grant SES-9978093 to Cornell University (Cornell Institute for Social and Economic Research), the National Institute on Aging Grant 5 R01 AG018854-02, and the Alfred P. Sloan Foundation. The views expressed herein are attributable only to the author(s) and do not represent the views of the U.S. Census Bureau, its program sponsors or data providers. Some or all of the data used in this paper are confidential data from the LEHD Program. The U.S. Census Bureau is preparing to support external researchers' use of these data; please contact U.S. Census Bureau, LEHD Program, Demographic Surveys Division, FOB 3, Room 2138, 4700 Silver Hill Rd., Suitland, MD 20233, USA.