Labor Market Dynamics and Analyst Ability

Abstract

We examine whether brokerage firms can identify differences in innate ability when hiring analysts. When the local unemployment rate is high, there will be a larger pool of job candidates per analyst job than when the unemployment rate is low. If brokerage houses can identify differences in ability, analysts hired by brokerage houses during these challenging times should have higher ability than those hired at other times. Using the local unemployment rate as a proxy for brokerage houses’ ability to identify differences in innate ability when hiring analysts, we find that analysts who are initially hired when the local unemployment rate is high are more likely to be elected All-Star analysts and obtain more All-Star awards than analysts who are initially hired at other times. However, these high-ability analysts, who otherwise might have chosen a different profession, are more likely to leave the profession when local labor market conditions subsequently improve. Overall, our study provides novel evidence that brokerage firms can identify differences in analyst-specific human capital when hiring analysts.

Keywords: Recession, Innate Ability, All-star, Career Path, Analyst Labor Market

JEL Classification: D83, G12, G24, J24, J44.