Research

This paper shows that managers matter not only as supervisors of current production but also as developers of talent: they help develop future managers. Using German linked employer-employee data, I document two facts about workers’ paths into management that point to this role. First, workers exposed to higher-quality managers earn persistently higher wages once they themselves become managers, even after switching firms, consistent with the accumulation of portable managerial skill. Second, higher manager quality is associated with a lower short-run probability that a worker transitions into management. To reconcile these patterns, I develop a quantitative model with three key features: on-the-job search, worker-to-manager transitions, and endogenous coaching choices by managers. Workers search while employed and receive offers from other managers or to become managers themselves. Managers allocate time between production and coaching, where coaching lowers current output but raises workers’ future managerial skill. When workers transition into management, accumulated skill carries over and affects their managerial wages.

In the model, exposure to a high-quality manager raises both current match value and the option value of learning. Workers therefore delay entry into management until they draw sufficiently attractive offers, but earn higher wages once they do transition. Calibrating the model to post-transition wage profiles and transition hazards, I show that the model can jointly rationalize both patterns. The calibrated model allows a comparison between the coaching managers choose and the allocation that maximizes discounted output. The gap arises because managers choose coaching but capture only part of its return and workers carry the skill they acquire into renegotiated wages, outside offers, and their own managerial careers. As a result, the model implies that equilibrium coaching falls short of the level that maximizes discounted output.