The Survival of Mediocre Superstars in the Labor Market

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 percent) 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.

Special ones? The effect of head coaches on football team performance

“…Theory suggests inefficient hiring in talent markets whereby mediocre workers are re-hired in the face of the risk associated with appraising the talent of workers that are new to an industry (Terviö, 2009) as there is a substantial amount of uncertainty about the talent of entry-level workers. Peeters et al (2022) confirm that this market failure exists among head coaches in professional football in England. In particular, they report that about one-quarter of rehired coaches are of lower ability than an average entrant, with clubs in lower divisions making more substandard hires.…”

“…Peeters et al. (2022) confirm that this market failure exists among head coaches in professional football in England. In particular, they report that about one‐quarter of rehired coaches are of lower ability than an average entrant, with clubs in lower divisions making more substandard hires.…”

The age‐wage‐productivity puzzle: Evidence from the careers of top earners

“…Our findings provide some further support for a theoretical model proposed by Terviö (2009), in which firms respond to uncertainty in the ability of younger workers by excessively bidding for older workers whose talent is better known. Empirical evidence on the effect of information about past performance on hiring decisions is currently limited (exceptions include Peeters et al., 2022; Pallais, 2014; Stanton & Thomas, 2016). This is a promising avenue for future research into the age‐wage premiums that appear to exist across a range of different labor markets.…”

“…16 This theory has proved difficult to test empirically. An exception is Peeters et al (2022), who studied the hiring of football managers in England, finding that employers seem to prefer lower ability managers with experience over novice managers with higher expected ability.…”

“…In most settings it is impossible to observe the relevant information that managers have when hiring a worker, but in sports labor markets we can observe past performance. There are some previous research findings that firms prefer to hire experienced workers, even if they are less productive in expectation (Peeters et al., 2022 on football managers; Pallais, 2014 in a field experiment; and Stanton & Thomas, 2016 on the value of intermediaries in online hiring for young workers). Our findings add to this body of evidence, which suggests that firms in some labor markets may be inefficiently and excessively sampling from the pool of known or experienced talent, at the expense of discovering and developing new talent.…”