Inefficient Hiring in Entry-Level Labor Markets

Abstract

Hiring inexperienced workers generates information about their abilities. If this information is public, workers obtain its benefits. If workers cannot compensate firms for hiring them, firms will hire too few inexperienced workers. I determine the effects of hiring workers and revealing more information about their abilities through a field experiment in an online marketplace. I hired 952 randomly-selected workers, giving them either detailed or coarse public evaluations. Both hiring workers and providing more detailed evaluations substantially improved workers' subsequent employment outcomes. Under plausible assumptions, the experiment's market-level benefits exceeded its cost, suggesting that some experimental workers had been inefficiently unemployed. (JEL J23, J24, M51)

Landing the First Job: The Value of Intermediaries in Online Hiring

“…This paper complements the findings in Pallais (2014) by showing that agencies have emerged to reduce the problem of the inefficient allocation of talent to job openings. The total gains from the presence of intermediaries in the marketplace appear substantial when considering firms' willingness to pay for agency affiliates.…”

“…In many relevant ways, the oDesk market resembles other spot markets for labor, such as the general model described in Tervio (2009), where employment of inexperienced workers, who lack verified performance data, is likely to be inefficiently low (Pallais, 2014). Many subsets of labor markets do have public revelation of ability from experience: Actors make films that are public outputs; graphic and web designers produce portfolios of work that are shared with clients; fund managers have documented performance histories through reporting returns; academics publish papers and have public records of citation counts; chefs have ratings from food critics, etc.…”

“…43 If no past agency affiliate has been revealed to be a low type, each worker's affiliation strategy is to accept the contract at t = 1 iff β 1 + β 2 ≤ (1 + h) w H . For workers at t = 2 and j = H or L, affiliation is accepted iff β 2 ≤ 0.…”

“…For workers who have s = 0, θ is unknown by the agency unless the worker has past experience. 43 Note that wages with superscriptes denote equilibrium wages, that may be earned by several types of workers. Wages with subscripts (ijt) denote the wages paid to a worker of type (ijt).…”

“…This allows them to capture a return from screening potential affiliates. In contrast, when only spot contracts are available, employers invest too little in determining inexperienced workers' quality because the return accrues to workers, as documented by Pallais (2014). The inability to capture the long-term value of investment in information is the same reason that firms may be reluctant to invest in providing general skills training (Becker, 1962) unless they have monopsony power or private information that allows them to capture the return 1998.…”