Managerial Ability and Labor Investment
Background Context: We often assume that more skilled managers simply make better business decisions, including how many people to hire. But is that always true? This study explores how the skills of top managers, called “managerial ability”, affect how companies invest in labor (i.e., how they hire and retain employees). We found that the relationship between a manager’s ability and hiring efficiency is not as straightforward as previously thought.
Findings: In general, hiring the right number of people is crucial for a company’s success. Too many employees can waste money; too few can hurt performance. We found that the best managers, those who are skilled at both running current operations (“exploitation”) and developing new ideas or products (“exploration”), tend to hire more workers than expected. They do this because innovation requires more people, even when the benefits are uncertain or take time to appear.
On the other hand, less capable managers tend to swing between hiring too many and too few people, perhaps because they struggle with forecasting or decision-making. Managers with mid-level ability tend to be the most efficient with labor: they make hiring decisions that closely match the company’s actual needs.
Societal Impact: These findings show that investing in talented leadership can pay off in the long run, not just through better day-to-day operations, but by enabling smart innovation. For policymakers, investors, and boards of directors, understanding a manager’s ability can help assess whether labor investments are wise or wasteful. For employees, it means that the quality of management could impact job stability and career growth.
Concluding Thoughts: The study challenges the traditional view that hiring efficiency always improves with better managers. Instead, we found that the very best managers may appear inefficient in the short term because they are investing in future growth. True talent lies in balancing immediate needs with long-term vision. Companies that support such visionary managers may reap rewards well beyond what the numbers initially suggest.
Anderson, M., Sherer, P., & Yu, D. (2025). Managerial ability and labor investment (external link, opens in new window) . Management Science. DOI: 10.1287/mnsc.2020.01932