The Survival of Mediocre Superstars in the Labor Market

High Wage Workers and High Wage Firms

Thomas Peeters, Stefan Szymanski and Marko Terviö

The Journal of Law, Economics, and Organization, 2022, vol. 38, issue 3, 840-888

Abstract: We argue that liquidity constrained firms face strong incentives to hire experienced, but low ability workers instead of novice workers with higher upside potential. Using four decades of high-frequency information on worker performance in a “superstar” labor market allows us to estimate the revealed ability of experienced workers at the time they are hired by a new firm. More than one-fifth of these hires are “substandard” in that the revealed ability of the hired experienced worker lies below the mean ability of recent novices. Even more hires (around 40%) are “mediocre,” as their ability falls short of the hiring threshold that maximizes the long-run average ability of the active workforce. Replacing mediocre hires by novice workers would increase the average ability of the workforce by 0.1 standard deviations. (JEL J31, J44, L83, M51).

Date: 2022
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