As we discuss in Chapter 16, the demand for labor depends on the marginal product of labor. In our basic model of a competitive labor market we assume that all workers have the same ability, skills, and training. Firms can hire as many workers as they would like at the market equilibrium wage. Because, by assumption, all workers have the same abilities, firms don’t have to worry about whether one person might be less able or willing to perform the assigned work than another person.
In reality, we know that most firms face more complicated hiring decisions. Even for a job, such as being a cashier in supermarket, that most people can be quickly trained to do, workers differ in how well they carry out their tasks and whether they can be relied on to regularly show up for work and to treat customers politely.
When hiring workers, firms face a problem of asymmetric information: Workers know more about whether they intend to work hard than firms know. Even for applicants who have a work history, a firm may have difficulty discovering how well or how poorly the applicant performed his or her duties in earlier jobs. In responding to inquiries from other firms about a job applicant, firms are rarely willing to do more than confirm that a person has worked at the firm because they are afraid that reporting anything negative about the person—even if true—might expose the firm to a law suit. In Section 16.5, we discuss the field of personnel economics, which includes the study of how firms design compensation policies that attempt to ensure that workers have an incentive to work hard.
When hiring someone entering the labor market, such as a new college graduate, firms have a particular problem in gauging the likely performance of a worker who may have no job history. In this case, there may not be a problem of asymmetric information because the worker may also be uncertain as to how well he or she will be able to perform the job, particularly if the worker has not previously held a full-time job in that field. When hiring new college graduates, firms may rely on an applicant’s college grades, the reputation of the applicant’s college, and the applicant’s scores on standardized test. Some firms have also developed their own tests to measure an applicant’s cognitive skills, knowledge relevant to the position applied for, and even psychological temperament. Some technology firms and investment banks ask applicants to complete demanding problems that may be unrelated to either technology or banking but can provide insight into whether the applicant has the cognitive ability and temperament to quickly complete complicated tasks.
Teams in the National Football League (NFL) face an interesting problem when hiring new players, particularly those playing the position of quarterback. College football players hoping to play professional football enter the NFL draft in which each of the 32 teams select players in eight rounds, with the selections being in reverse order of the teams’ records during the previous football season. There is often a substantial gap between an athlete’s ability to be successful playing college football and his ability to be successful in the NFL. As a result, many players who are stars in college are unable to succeed as professionals.
The position of quarterback is usually thought to be the most difficult to succeed at. Many highly-regarded college quarterbacks fail to do well in the NFL. Teams typically settle on one player as their starting quarterback who will play most of the time. But teams also have one or two backups. Sometimes the backups are older, former starters on other teams, but often they are players chosen in the draft of college players. It’s very difficult to judge how well a quarterback is likely to perform except by seeing him play in a game. Players who perform well in practice often don’t play well in games. As a result, a backup quarterback may be drafted and, if the starting quarterback on his team remains healthy and is effective, earn a nice salary from year to year without actually playing in many games. If a team’s starting quarterback is injured or is ineffective, the backup quarterback may play in several games during a season.
If the backup shows himself to be an effective player, the team may decide to retain him as the starter—with a substantial increase in salary. But given the difficulty of playing the position of quarterback, a more likely outcome is that the backup plays poorly and the team decides to draft another backup quarterback the following year.
The result is an odd situation: The more that a backup quarterback plays in games, often the less likely he is to keep his job. And the less that a backup quarterback plays, the more likely he is to keep his job. Or as one NFL head coach put it: “Backups who don’t play a lot tend to have long NFL careers, while those who are exposed [by actually] playing … have shorter careers.”
This outcome is an extreme example of the difficulty firms sometimes have in measuring how well new hires are likely to perform in their jobs.
Source for quote: Sportswriter David Lombardi on Twitter, quoting San Francisco 49ers’ head coach Kyle Shanahan, December 14, 2020.