Macroeconomic Consequences of the Allocation of Talent

This afternoon I'm attending a seminar on "The Allocation of Talent and U.S. Economic Growth" by Chang-Tai Hsieh, Erik Hurst, Charles Jones, and Peter Klenow. Here's the abstract of the paper:

In 1960, 94 percent of doctors and lawyers were white men. By 2008, the fraction was just 62 percent. Similar changes in other highly-skilled occupations have occurred throughout the U.S. economy during the last fifty years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage. This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20 percent of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.

The paper notes that "A large literature attempts to explain why white men differ in their occupational distribution relative to women and blacks and why those differences have been changing over time. Yet no formal study has assessed the effect of these changes on aggregate productivity. Given that innate talent for many professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented blacks and women were not pursuing their comparative advantage. The resulting misallocation of talent could potentially have important effects on aggregate productivity."

The authors build a model in which people are born with a range of talents across all possible occupations and choose the occupation with the highest return, subject to some frictions representing labor market discrimination and discrimination in the acquisition of human capital. The frictions essentially act as "taxes" that differ across time, demographic group, and occupation, distorting the optimal allocation of talent across occupations. They use Census data to quantify these frictions decade by decade. They find large reductions in the barriers to occupational choice facing women and blacks from 1960 to 2008. Using a general equilibrium setup of their model, they calculate that falling barriers may explain 15 to 20 percent of aggregate wage growth and 75 percent of the rise in women’s labor force participation over that time period.

As part of their empirical work, the authors construct an occupational similarity index that measures how closely the occupational distribution of white females, black males, and black females compares to the occupational distribution of white males. The index runs from zero (no overlap with the occupational distribution for white men) and one (identical occupational distribution to white men). Table 1 of the paper shows how the index has evolved over time:

Hsieh et al (2013), Table 1

They also estimate the occupational frictions for different occupations. Figure 3 below shows their barrier measure for white women in select occupations. A barrier of 1 means that there is no friction relative to white men. They interpret the graph to indicate that "white women in 1960 did not have an absolute advantage over white men in the home sector. In essence, we find that white women were choosing the home sector because they were facing disadvantages in other occupations. Figure 3 shows that τˆig is close to 1 for white women in the home sector in all years of our analysis. This suggests women did not move out of the home sector because they lost any absolute advantage in the home sector. Instead, our results suggest that women moved into market occupations due to declining barriers in the market."

Hsieh et al (2013), Figure 3

In the conclusion, the authors note that "We have focused on the gains from reducing barriers facing women and blacks over the last fifty years. But we suspect that barriers facing children from less affluent families and regions have worsened in the last few decades. If so, this could explain both the adverse trends in aggregate productivity and the fortunes of less-skilled Americans in recent decades." I think this is a very important point.

I would also add that the benefits of reducing occupational barriers to different groups reach far beyond aggregate productivity and wage gains. In the model, people get utility from consumption and from leisure time. But I think people can also get a lot of utility from doing work that they enjoy, if they actually have the opportunity to pursue the kind of career they want. There is considerable utility to feeling like you have wide opportunities, and to choosing a job you like, regardless of wage. For example, I don't really know how my comparative advantage in economics--a profession that very few women could choose in the 1960s-- compares to my comparative advantage in a lot of other occupations. In terms of maximizing my wages and leisure, it was certainly not my optimal choice. But I much prefer a world in which I have that choice than a world in which I don't.

In the occupational choice model, each person is endowed with a certain amount of talent in each occupation  and, fully aware of their talents, can make their decisions about human capital accumulation and occupation. In reality, there is a considerable discovery process to becoming aware of our own talents. A young girl doesn't wake up and think, "Hey, I have a lot of talent for computer programming. I think I'll go to college and get a degree in computer science and then work for a tech company." She especially doesn't think this if she barely has access to a computer and has no role models who work in that area or teachers who help her discover her talents. So there is another friction, a "talent discovery" friction, that might be in play. And this friction also varies across groups and occupations. A lot of boys whose fathers are engineers discover that they have engineering talent (I noticed this at Georgia Tech.) But for a lot of other kids, it never occurs to them to even consider whether they might make a good engineer. So I think there are externalities to having more underrepresented groups in highly-skilled occupations, by making these occupations more visible to young people who might face high "talent discovery frictions."