Impact Investing and Worker Outcomes: Evidence from U.S. Firms

Josh Lerner | Markus Lithell | Gordon Phillips

Apr 28, 2025

Key Takeaways

This study examines how impact investors, compared with traditional venture capitalists and non-funded firms, influence worker outcomes by translating social objectives into tangible changes.
Impact-backed firms are disproportionately located in economically disadvantaged regions, featuring higher concentrations of Black, low-income, and unemployed residents. Impact investors are also more likely to invest in businesses with Black or Hispanic founders and employ workers with greater representation of racial minorities, women, and less educated individuals.
Although impact-funded firms show stronger post-investment performance than non-funded firms, their growth in employment and payroll lags behind that of venture-backed firms.
Employees at impact-backed firms experience higher wage growth than those at non-funded firms, although this growth is smaller than that seen in venture-backed firms. Within impact-backed firms, minority and rank-and-file workers experience relatively larger wage increases.
Impact portfolio companies show a greater propensity than venture-backed firms to hire individuals from underrepresented backgrounds, such as racial minorities, women, and workers without a college degree.
The findings suggest impact investors prioritize social objectives, particularly in terms of workforce composition and wage equity, though this focus may come at the cost of overall firm growth.

Source Publication:

Lerner, Josh, Lithell, Markus, and Phillips, Gordon M., “Impact Investing and Worker Outcomes” (2025). SSRN Working Paper

Does Impact Investing Change Labor Market Outcomes?

Impact investing, a form of private equity investment aimed at generating both financial returns and positive social impact, has surged in popularity in recent years. Although the financial performance of impact funds has been studied, little is known about the real impacts of these investments on labor market outcomes. This study addresses this gap by examining whether firms backed by impact investors demonstrate distinct labor market dynamics—particularly in employment, payroll growth, and wage distribution—compared with those supported by traditional venture capital and non-funded firms.

Data and Methodology

The study leverages confidential microdata from the U.S. Census Bureau, specifically the Longitudinal Business Database and the Longitudinal Employer-Household Dynamics database. The sample consists of firms identified in the Project on Impact Investments’ Impact Investment Database, matched with venture-backed and non-funded control firms using a nearest-neighbor matching procedure. Matching criteria include industry, firm size, age, and pre-investment growth characteristics, ensuring comparability across groups.

To analyze post-investment changes in firm and worker outcomes, the researchers employ a difference-in-differences regression framework with firm and year fixed effects. Worker-level earnings and hiring patterns are examined using additional matched regressions, controlling for worker characteristics, industry, and state-level factors. Multinomial logistic regression is also used to assess the likelihood of impact funding based on firm and geographic characteristics.

Findings and Discussion

#1 Targeting Disadvantaged Communities and Underrepresented Founders

The analysis confirms impact investors disproportionately allocate capital to firms operating in economically distressed areas—those with higher poverty rates, larger Black populations, and elevated unemployment. The same pattern does not hold for traditional venture capital firms.

Furthermore, impact-backed firms are significantly more likely to have Black or Hispanic founders and to employ workforces with a higher share of racial minorities, women, and individuals without a college education. This finding suggests impact investors actively pursue social objectives related to economic inclusion, in line with their stated mission.

#2 Firm Performance: Trade-offs between Growth and Equity

Both impact and venture-backed firms outperform non-funded control firms in terms of post-investment employment, payroll, and revenue growth. However, impact-backed firms generally experience less pronounced growth than their venture-backed counterparts.

Whereas venture capital firms typically prioritize aggressive expansion, impact investors may focus on social outcomes, potentially leading to a more measured approach to scaling. The findings suggest impact investing may involve trade-offs, where the pursuit of equitable workforce outcomes comes at the expense of overall firm growth.

#3 Worker Earnings: A More Equitable Wage Distribution?

At the worker level, employees at impact-backed firms experience higher wage growth than those at control firms, but lower than workers at venture-backed firms. However, the distribution of wage increases within impact firms differs from that of venture-backed firms. Specifically, minority and rank-and-file workers at impact-funded firms see larger wage increases than their counterparts in venture-backed firms. This finding suggests impact investors may allocate resources in a way that reduces income disparities within firms, prioritizing equitable wage growth over maximizing aggregate payroll expansion.

#4 Hiring Practices: Expanding Access to Employment

Impact-backed firms also demonstrate distinct hiring patterns. They are more likely than venture-backed firms to employ Black or Hispanic individuals, women, and workers without a college degree. This hiring trend underscores the role of impact investing in expanding economic opportunities for historically underrepresented groups.

Implications for Policy and Investors

These findings have important implications for both policymakers and investors interested in leveraging private capital for social good.

For policymakers, impact investing appears to be an effective mechanism for directing capital toward disadvantaged communities and promoting workforce inclusivity. However, the potential trade-offs between social impact and firm growth highlight the need for careful policy design. Regulations or incentives that encourage both impact goals and business expansion could help mitigate these trade-offs.

For investors, the study underscores the unique value proposition of impact investing: although impact-backed firms may not match the growth trajectories of venture-backed firms, they make meaningful contributions to employment diversity and wage equity. Investors seeking to balance financial returns with a measurable social impact may find these insights particularly relevant.