1.

Recruiting and Internal Labor Markets

Recruitment in perfect market (Lazear, Gibbs – 2009)
 Low qualified, low-wage employees are preferred if the unit labor costs are lower high qualified workers
Wi/Qi < Wh/Qh
 Or if the rise in output by the high qualified is lower than the rise in wages (costs) by the high qualitied
compared to low qualified Qh/Qi < Wh/Wi
 Hire how many? Marginal cost = marginal revenues

Asymmetric information (Lazear, Gibbs – 2009)

 Screening with aid of selection instrument (assessment tests)
 Screening through signals (education)
 Screening through self-selection (reduce of asymmetric Info through specific contract arrangement →
wage scheme)
 Internal labor market (combination)

Signaling Theory (Spence – 1973)

 To handle asymmetric information → screening through signals
 Productivity (innate) is unobservable but can be revealed by signals
 Education does not increase productivity but ceritified level of productivity
 Productivity must be positively correlated with education and cost must be negatively correlated with
productivity (if all have same signal, it would be useless)
 Pooling equilibrium: both types either choose to complete or not to complete → cannot distinguish low
and high productive employee
 Separating equilibrium: choose completely different choice

Employee signaling (Kroch, Sjoblom – 1994)

 Sy number of schooling years, Sr educational rank
 Years of schooling Sy has a significant positive effect on earnings
 Rank does not have a positive effect on earnings
 Clear evidence to support human capital theory and less for signaling theory

Employer signaling (Backes Gellner/Tuor – 2010)

 Challenge is to recruit a sufficient number of qualified workers and avoid labor shortages
 Ability to fill job vacancies is not evenly distributed among firms
 Reliable signal: 1) signaling costs have to be negatively correlated with productivity, 2) signal has to be
related to the work aspect that workers attach a high value to
 → Non observable job characteristics are very important factors in a worker’s choice (even more than
monetary incentives)
 → apprenticeship training increases recruitment success and lowers job vacancies significantly
 2. Training as Human Capital Investment
Education is an investment which increase productivity

Investment in education (Lazear, Gibbs – 2009)

Make investment as long as PV(cost) < PV(return)

On the Job Training (Lazear, Gibbs – 2009)

 General Human Capital: 1) increases productivity inside and outside firm, 2) marketable skills, 3) wage =
marginal productivity → firms cannot earn a return on the training and thus will not bear the costs
 Firm Specific Human Capital: 1) increases productivity only in the training firm, 2) not marketable skills, 3)
wage < marginal productivity → firms earn a return because wages are below marginal productivity and
due possible renegotiation, cost are shared

Apprenticeship training (Mohrenweiser, Backes Gellner – 2010)

 Substitution motivation: if the firm has negative nest costs, apprentices may substitute unskilled and semi-
skilled employees. Retention not requirement
 Investment motivation: if the firm has to bear training costs, apprenticeship training can be seen as a
superior recruitment process and possible port of entry in internal labor markets
 → motivation to provide apprenticeship training are not homogeneous
 → firms with lower capital equipment, no work council, higher share of white collar workers, small firms
are more likely to follow a substitution strategy

Non participation in training (Wolter et al – 2006)

 Training firms have negative net costs
 Non training firms would have positive net costs if they provided apprentice training
 Difference between training and non-training firms is due to a high benefit differential indicating that the
latter do not have enough productive work to be performed by apprentices

On the Job Training – the skill-weight approach (Lazear – 2009)

 All skills are general but combination of skills are firm specific
 Firms invest in OJT when: 1) specificity increases, 2) variance of skill mix on external labor market
decreases, 3) exogenous probability of separation decreases, 4) market thickness decreases → workers less
likely to invest in the firm’s skills

On the Job Training – the skill-weight approach (Geel, Mure and Backes-Gellner – 2011)
 Occupational specificity: the more specific the skill requirements compared to the labor market in general,
the bigger share of training costs covered by the firm → although all single skills are general, the
combination of these skills is occupation-specific. Apprenticeship training should not be considered to be
general: dependent on the degree of specificity it can rather general or specific
 Occupational mobility: he more specific the skill requirements compared to the labor market in general,
the smaller likelihood that workers change occupation after completing the training. – in the short and long
run, occupational mobility seems to be restricted; the employee is bound to the original occupational if its
skill combination is specific

3. Layoffs and Quits

  Workers with pure general human capital will be laid off first as there is no quasi rent → no quasi-rent loss
 Workers with firm specific human capital will be laid off first starting from both end of the age distribution
 Quasi rent = present value of expected future productivity – present value of expected future wage
 If demands sinks, 1) layoff from both ends of the seniority distribution, 2) stop hiring new workers
 Buyout can be an efficient strategy to layoff workers to not loose their reputation as reliable employers

Layoffs, quits and wage negotiation (Gielen and van Pours – 2010)
 Which worker firm matches are most likely to dissolve?
 Quit: separation initiated by the worker
 Layoff: separation initiated by the firm
 Quit may be inefficient if it could be prevented through wage renegotiation → if higher wage outside, give
the same salary as still profitable since match surplus of a newly hired worker is even lower
 Layoff inefficient if a wage reduction would have prevented the dismissal and if the outside wage is lower
than the reduced wage → worker better off when staying for a reduced wage
 Efficient separations when: 1) match surplus became negative, 2) match surplus too small for
compensation → depends on size of match surplus, size of shocks and possibility of renegotiation of the
wage
 Conclusion:
→ separation are not a linear function of the match surplus
→ workers with low match surplus are most likely to quit or to be laid off
→ workers with very high match surplus are likely to quit: firms complete to get those workers
→ inefficient quit are rare, inefficient layoffs occur frequently

Consequences of layoffs and quits (Balestra, Backers Gellner – 2012)

 Effects of layoffs and quits on worker’s wage before and after separation
 Method: demeaned panel data, Poisson pseudo MLE (PPML)
 Conclusion:
→ layoffs are the only type of separation that implies persistent losses
→ voluntary separations imply higher earnings after separation
→ small pre-layoff earnings losses can be attributed to wage renegotiation

Job changes and wage growth (Bingley, Westergaard Nielsen – 2006)

 From a worker’s perspective, which factors play a key role in explaining mobility and does mobility change
over the life cycle?
 Wage differentials play a key role in explaining high job mobility. Workers search for the best pay schemes
and they do this by jumping wage trajectories of different firms
 For men, immediate wage difference in level is more than important than wage in competing firms
 Probability of changing firms declines over the lifecycle
 4. Workforce Demography
Job opportunities for older workers (Hirsch et al. – 2000)
 With shift in the demographic pyramid towards old people firms face: 1) recruitment of young works will
be difficult, 2) due to ongoing technological change an ever growing number of skilled workers is needed
 Keys to increase old age employment: 1) stepness of age-earnings, 2) production technology/organization
of work, 3) training and training (dis)incentives, 4) incentives for early retirement
 Higher supply of older workers might lead to a flatter wage profiles in the long run. Such wage profiles
might increase labor demand for older workers
 Later retirement ages induced are likely to lead employers to search for alternative arrangements and
increased flexibility to better use the knowledge of older workers and younger workers alike
 Older workers are more likely to be laid off in downsizing periods: 1) wage above marginal productivity →
low quasi rent, 2) have more attractive outside option: retire early, subsidies to bridge gap until retirement,
leisure
 Smaller shares of older workers in: 1) companies with steep age earnings profiles relative to productivity, 2)
industries with rapid technological change, 3) job which requires less continuing vocational training and
learning on the job
 Conclusion:
→ limited access for older workers to job with 1) steep age earnings profile, 2) pension coverage, 3) high
requirements of computing skills

Age and productivity (Pekkarinen and Uusilato – 2012)

 Study effect of ageing on worker productivity at the individual level
 Difference between piece rate and time rate earning is larger for younger workers → they are cheaper:
fixed rate wage is much lower than piece rate (productivity)
 Conclusion:
→ no dramatic effects on productivity tasks where worker output can be measured by piece rate earnings
→ productivity increases rapidly up to 30, peaks around 45 and decreased slightly after
 5. Compensation
 How to measure performance? 1) broad vs narrow measures → define the worker’s area of responsibility,
2) output vs input based performance measures, 3) quantitative vs subjective (qualitative) evaluation →
output per hour vs supervisor’s evaluation

Quantitative evaluation
 Common distortions in quantitative performance measures: 1) measuring quantity but ignoring quality, 2)
intangibles, 3) opportunity costs (cost of foregoing other alternatives), 4) group size (individual worker,
team, firm), 5) time horizon (backward looking – long term consequence)
 Distortion: different aspects of the job are given inappropriate weights, causing employees to emphasize
some thongs too much and others too little (quantity vs quality)
 Manipulation: occurs because of workers’ strategic use of asymmetric information (specific knowledge).
They use their knowledge to improve their performance measures (even when the actions do not improve
firm values (increasing orders, canceling, reordering)
 Consequence of manipulation: quality of a performance metric may systematically degrade over time once
it is used for incentive purposes → vicious circle

Subjective evaluation
 Important point of subjective evaluations: define responsibility → employee should be responsible for
events that are controllable by the employee.
 adverse event: should aim at preventing damage
 positive event: should aim at taking the opportunity
 Benefits of subjective evaluation: 1) improve on quantitative performance measures → a) by filtering out
uncontrollable factors, the risk to the employee can be reduced, b) by giving an adequate weight to
dimensions of the job that are hard to quantify but important, distortions in incentives might be avoided, c)
by providing the possibility to act ex post on manipulation, the incentive for the worker to manipulate may
be reduced, 2) improvement in terms of incentives for risk taking (good results are rewards but mistakes
are not punished), 3) improvement in term of decision making (employees are motivated to use their
specific knowledge), 4) increases in flexibility of incentive system (changes in incentives), 5) positive effects
of expanded communication (regular conversions between supervisors and employees might improve
employees’ effectiveness), 6) a form of training if the evaluation involved managers in passing their
experience to their employees
 Limitations of subjective evaluations: 1) reluctance to give negative ratings, because it will affect workers’
attitude and motivation in the future, 2) intrinsically subjective (personal opinions), 3) usually take time
and effort to prepare and do it, especially if compared to readily available quantitative performance
measures, 4) subjective performance measures can also be manipulated

Conclusion
 performance evaluation is difficult, but nevertheless very important
 ideal performance evaluation → evaluation that takes account of all the employee’s actions on firm value
 however for most jobs this is virtually impossible
 both types of performance evaluations have some advantages but also limitations, which then have to be
balances against each other