Allocating Effort and Talent in Professional Labor Markets

Gadi Barlevy and Derek Neal

No 23824, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In many professional service firms, new associates work long hours while competing in up-or-out promotion contests. Our model explores why these firms require young professionals to take on heavy workloads while simultaneously facing significant risks of dismissal. We argue that the productivity of skilled partners in professional service firms (e.g. law, consulting, investment banking, and public accounting) is quite large relative to the productivity of their peers who are competent and experienced but not well-suited to the partner role. Therefore, these firms adopt personnel policies that facilitate the identification of new partners. In our model, both heavy workloads and up-or-out rules serve this purpose. Firms are able to identify more professionals who can function effectively as partners when they require new associates to perform more tasks. Further, when firms replace experienced associates with new workers, they gain the opportunity to identify talented professionals who will have long careers as partners. Both of these personnel practices are costly. However, when the gains from increasing the number of talented partners exceed these costs, firms employ both practices in tandem. We present evidence on life-cycle patterns of hours and earnings among lawyers that supports our claim that both heavy workloads and up-or-out rules are screening mechanisms.

JEL-codes: J01 J22 J44 M51 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-bec, nep-lma and nep-ltv
Note: LS
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Citations: View citations in EconPapers (1)

Published as Gadi Barlevy & Derek Neal, 2019. "Allocating Effort and Talent in Professional Labor Markets," Journal of Labor Economics, vol 37(1), pages 187-246.

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Related works:
Working Paper: Allocating Effort and Talent in Professional Labor Markets (2016)
Working Paper: Allocating Effort and Talent in Professional Labor Markets (2016)
Working Paper: Allocating Effort and Talent in Professional Labor Markets (2016)
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