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Allocating Effort and Talent in Professional Labor Markets

Author

Listed:
  • Barlevy, Gadi

    (Federal Reserve Bank of Chicago)

  • Neal, Derek

    (University of Chicago)

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.

Suggested Citation

  • Barlevy, Gadi & Neal, Derek, 2016. "Allocating Effort and Talent in Professional Labor Markets," IZA Discussion Papers 9858, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp9858
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    References listed on IDEAS

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    Cited by:

    1. Fudenberg, Drew & Georgiadis, George & Rayo, Luis, 2021. "Working to learn," Journal of Economic Theory, Elsevier, vol. 197(C).
    2. Radoslawa Nikolowa & Daniel Ferreira, 2018. "How to Sell Jobs," Working Papers 846, Queen Mary University of London, School of Economics and Finance.
    3. Alexander Bick & Adam Blandin & Richard Rogerson, 2022. "Hours and Wages," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(3), pages 1901-1962.
    4. Michael Dinerstein & Isaac M. Opper, 2022. "Screening with Multitasking," CESifo Working Paper Series 9869, CESifo.
    5. Ferreira, Daniel & Nikolowa, Radoslawa, 2024. "Prestige, promotion, and pay," LSE Research Online Documents on Economics 118369, London School of Economics and Political Science, LSE Library.
    6. Dana Foarta & Takuo Sugaya, 2021. "The management of talent: Optimal contracting for selection and incentives," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 49-77, March.
    7. Karin Mayr‐Dorn, 2023. "Adverse Selection, Learning, And Competitive Search," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 129-153, February.

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    More about this item

    Keywords

    up-or-out; long hours; screening;
    All these keywords.

    JEL classification:

    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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