Employment Risk and Job-Seeker Performance

High levels of job uncertainty in developing countries may have significant implications for job performance. This paper examines the relationship between employment risk and job-seeker performance. To induce exogenous variation in employment risk, the outside options for job seekers undergoing a real recruitment process were randomized by assigning them a 0, 1, 5, 50, 75, or 100 percent chance of real alternative employment of the same duration and wage as the jobs for which they were applying. The findings show that job-seeker performance is highest and effort is lowest among those assigned the lowest employment risk (a guaranteed alternative job), and performance is lowest and effort highest among those facing the highest employment risk (those without any job guarantee). Moreover, a nonlinear relationship exists between employment risk and performance. The findings are consistent with a framework that ties together insights from economics and psychology--that is, performance is an increasing function of effort and an inverse U-shaped function of stress. The results are not driven by gift exchange, stereotype threat, or the nutritional efficiency wage hypothesis. These performance improvements have significant welfare implications. In this study, job seekers assigned a high probability of receiving an outside option were twice as likely to be hired in the standard job recruitment process compared with those assigned a low probability of receiving an outside option. More broadly, these results suggest that stress-induced performance reductions are a potential mechanism through which exposure to high employment risk can perpetuate poverty and unemployment.