Allocating Effort and Talent in Professional Labor Markets

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 facing significant risks of dismissal. We argue that the productivity of skilled partners in professional service firms, e.g. law, consulting, investment banking, public accounting, etc, 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 identi- fication of new partners. In our model, both heavy work loads and up-or-out rules serve this purpose. Market participants learn more about new workers who perform more tasks, and 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.