Hiring Risky Workers

Uncertainty presents a major challenge to employers who are formulating a hiring policy. Despite their best efforts, worker quality is not known with certainty at the time of hire. Indeed, precise information on worker quality may never be available. Firms must make employment decisions under uncertainty. But uncertainty, generally regarded negatively, has a positive feature: if an employer cannot assess precisely a worker’s productivity, there is a chance that the worker will turn out better than expected, instead of worse. Variance provides employers with an option: risky workers have value because a better-than-expected worker can be kept and a worsethan-expected worker can be terminated. This point raises a number of questions. Should a firm favour risky hires over safe ones? When should a firm invest to increase the information that it has about a job candidate? Consistent with the optimising behaviour of firms is the market equilibrium that results. What can be said about the nature of this equilibrium? How, for example, does the market value risk in new candidates? Are there predictable variations in compensation for ‘new’ versus ‘used’ candidates?