Institute for Research on Labor and Employment

A model of a labor market is proposed where the level of individual talent can only be learned on the job and where job positions are scarce. Inability to commit to long-term contracts leaves firms with insufficient incentives to hire novices, causing them to bid excessively for the pool of revealed talent instead. This causes the market to be plagued with too many mediocre workers and inefficiently low output levels, while simultaneously raising the wages for high talents. This problem is most severe where information about talent is initially very imprecise but revealed relatively quickly on the job. I argue that high incomes in professions such as entertainment, team sports, and entrepreneurship, may at least partly be explained by the nature of the talent revelation process in those markets. I suggest historical episodes that could be used to identify the inefficiency and the excessive talent rents predicted by the model.