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Tuesday, March 13, 2018 at 11:15am to 12:45pm
Sage Hall, 333
Johnson Graduate School-Management, 106 Sage Hall, Ithaca, NY 14853-6201, USA
Benjamin Friedrich - Northwestern University
Internal Labor Markets and the Competition for Managerial Talent
Abstract: This paper studies how firms use internal promotions and external hiring to recruit managers. Using matched employer-employee data from Denmark, I document that more productive firms hire more talented trainees, are more likely to promote managers internally, and match with better managers in terms of education and ability. Based on these facts, I develop an assignment model of the market for managers with two-sided heterogeneity. In the model internal labor markets arise from asymmetric learning and firm-specific human capital. Production complementarities between firm productivity and manager talent result in better firms investing in promising workers and in developing talent through firm-specific training and internal promotion. I estimate the model using Danish data. Model simulations indicate that reducing information frictions increases aggregate productivity but leads to higher wage inequality because better signals of talent increase competition for the best managers. This mechanism provides a new market-driven explanation for the increase in upper-tail wage inequality.