Wednesday, July 18, 2012

The mystery of the human and the trade-offs of control

What is the biggest difference in decision-making between buying equipment and hiring a person?  The characteristics of the equipment are much easier to discern.

Sure, there can be hidden flaws in machinery and buildings. You may have to take the equipment for a test run, you may need some expert to have a look at it, but, in a very important sense, what you see is what you get. And, once you are used to one example of a piece of equipment, the next item of the same thing is likely to have the same characteristics. Indeed, the higher quality the provider, the more reliable this sameness is.

People are so not like that. They vary greatly in ways which matter to an employer (or, indeed, anyone else seeking to interact with them) but which are not easy to discern. The only reliable way to find out about a particular person is to interact with them. (Nobel Laureate James Heckman has co-written a study on how "soft skills" matter [pdf] [via], on how personality traits affect life outcomes yet can be hard to assess.)

Who is telling me
Much of how labour markets work is dominated by the opacity of relevant personal characteristics. For example, the biggest labour market intermediary (way people get jobs) is generally "friends, relatives, acquaintances, etc"--someone they know told them about the job and/or the employer about them.

You can spread information about a job much more easily by posting a job vacancy.  But that will tell you almost nothing about the applicants. Personal networks provide much richer information; even if it is just "I don't know Bob, but Kate recommended him and Kate wouldn't steer me wrong" and/or "I have a high regard for Kate's judgement". You can judge the recommendation on the reliability of the recommender and to what extent the recommender is, in effect, acting as a guarantor (so as to avoid harming your existing connection).

Recommendation through existing networks thus becomes a proxy for judging the personal characteristics you cannot directly discern.

It tells me what
Such proxies abound. Has someone else taken the risk of hiring you? If yes, have they persisted in that choice for any length of time?  Hence the best place from which to get a job is being already in one. Does your education suggest that you have application and persistence? Hence the value of education qualifications is surprisingly weakly connected to the alleged content of that education. And so forth.

This is where making it hard to sack someone (in Australia "unfair dismissals" legislation) tends to so retard the operation of labour markets, for it greatly increases the risk in hiring someone precisely because of the opacity of personal characteristics. If the minimum cost of getting rid of a complete dud is, say, $3,000 in legal fees, employer time and "go away" money, then that adds a $3,000 risk premium to every hire. This is then offset by not hiring if it pushes the risk too high for expected benefits or relying even more heavily on other filtering mechanisms. Both responses hit the most marginal would-be labour market entrants hardest. But, like much labour market regulation (indeed, much regulation generally), job-protection legislation is about protecting incumbents.

It also weakens the signal of simply being in a job, as the employer's persistence in keeping you becomes a weakened recommendation.

What can I tell?
Given the difficulty in discerning the relevant characteristics, the harder it seems to "read" someone, the less attractive they are as employees. Language and cultural differences--to the extent they seem to make it harder to discern characteristics, communicate information and predict behaviour--become an employment negative. Effects which can be hard to distinguish from actual ethnic antipathy.

So, if you are a young Muslim male in a Western European country with strong "job protection" legislation, your chances of employment are not good. Or even just being young; there are reasons why France exports young people to Britain (while Britain exports retirees to France), as these job emigres in London (helping to make London France's sixth biggest city) can attest:

[Read the rest at Skepticlawyer.]

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