Allocating Effort and Talent in Professional Labor Markets

65 Pages Posted: 5 May 2016  

Gadi Barlevy

Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Derek A. Neal

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-03-04

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 work loads 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 work loads 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 less productive 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 support our claim that both heavy work loads and up-or-out rules are screening mechanisms.

Keywords: up-or-out, labor market, long hours, professional workers, screening

JEL Classification: J22, J44, M51

Suggested Citation

Barlevy, Gadi and Neal, Derek A., Allocating Effort and Talent in Professional Labor Markets (2016-03-04). FRB of Chicago Working Paper No. WP-2016-3. Available at SSRN: https://ssrn.com/abstract=2775584

Gadi Barlevy (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Derek Allen Neal

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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