A new study in the American Economic Review explains why top professional firms often hire bright people, train them, and then let many leave after a few years. Two financial economists, from the University of Rochester and the University of Wisconsin–Madison, built a model to explain this pattern.
The model focuses on fields such as law, consulting, fund asset management, auditing, and architecture where individual results are visible. At first the firm can judge talent better than clients. Over time public results make clients learn about workers. When information is similar, the firm may pay some more or let some leave. Letting people go can raise firm profits and still signal ability for those who leave.
Difficult words
- elite — highly respected and successful people or groups.
- talented — having a natural ability or skill.
- practice — a method or way of doing something.
- clients — people or companies that receive services.
- performance — how well someone does their job.
- signals — shows or indicates something.
- reputation — what people think about someone or something.
Tip: hover, focus or tap highlighted words in the article to see quick definitions while you read or listen.
Discussion questions
- Why do you think some employees accept lower pay temporarily?
- How might a good reputation help workers earn more later?
- What are the benefits of hiring talented individuals for firms?
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