The Survival of Mediocre Superstars in the Labor Market[High Wage Workers and High Wage Firms]

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).