Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities

Abstract

This paper proposes a model of the firm as a “team assembly technology,” with the aim of explaining why differences between firms represent a large and growing dimension of wage inequality. In the model, firms assign tasks to workers who vary in overall quality and task specific skills. Hiring takes place in a frictional labor market. Worker-task specialization not only reinforces the potential gains from team production, but also endogenously generates coworker complementarity: the quality of the least capable team member disproportionately influences joint output. In equilibrium, therefore, employers hire workers of similar quality and those with superstar teams pull away in terms of productivity and pay. The key model mechanisms are validated using rich administrative micro data. A theory-informed measure of coworker complementarity doubles from the mid-1980s to the 2010s, mirroring a shift towards greater task complexity. According to a structural estimation exercise, this rise explains close to 40% of the empirically observed increase in the between-firm share of wage inequality in Germany. Additionally, the model sheds light on how the interaction between specialization and labor market frictions influences total factor productivity.