David R. Henderson  

Hiring Without Signals

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Readers of Econlog who read co-blogger Bryan Caplan's posts know that Bryan has posted a lot on a college degree as an expensive signal to potential employers. Here are 88 posts Bryan has written on signaling.

I find Bryan's argument and evidence persuasive. Like some of his critics, though, I have often wondered why employers don't figure out cheaper ways of getting information about potential employees. You might argue that the expense is not on the employer but on the employee. But if an employer can find a good employee who lacks a college degree, the employer can, all other things equal, pay less.

In Wednesday's Wall Street Journal is an interesting news story by Rachel Feintzeg titled "Why Bosses Are Turning to 'Blind Hiring'." (WSJ, January 6, 2015, p. B4)

Here are the first 5 paragraphs:

Compose Inc. asks a lot of job applicants. Anyone who wants to be hired at the San Mateo, Calif., cloud-storage firm must write a short story about data, spend a day working on a mock project and complete an assignment.

There is one thing the company doesn't ask for: a résumé.

Compose is among a handful of companies trying to judge potential hires by their abilities, not their résumés. So-called "blind hiring" redacts information like a person's name or alma mater, so that hiring managers form opinions based only on that person's work. In other cases, companies invite job candidates to perform a challenge--writing a software program, say--and bring the top performers in for interviews or, eventually, job offers.

Bosses say blind hiring reveals true talents and results in more diverse hires. And the notion that career success could stem from what you know, and not who you know, is a tantalizing one. But it can be tough to conceal a person's identity for long.

Kurt Mackey, Compose's chief executive, realized his managers tended to pick hires based on whom they connected with personally, or those with name-brand employers like Google Inc. on their résumés--factors that had little bearing on job performance, he says.


Time will tell how well this works. If it does work well, expect to see more of it. And if that happens, the repercussions for colleges will be large. And, as anyone who knows Bryan's work also knows, the repercussions will be welcomed by Bryan.


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CATEGORIES: Labor Market




COMMENTS (18 to date)
Tom West writes:

Personally I find the biggest impediment to better procedures is often that someone will have to exercise judgement, and in many jobs, if you exercise judgement, it means that you become personally responsible for any failures.

If you are following standard practices, however, then failure is simply a matter of 'unavoidable' random chance.

It's much akin to buying inferior, expensive stuff from the primary vendor in the field. Find a better deal, and you'll get mild praise for saving a few bucks, but woe betide you if the equipment fails, even if it has the same failure rate as the more expensive equipment.

Anyway, here's hoping I am too pessimistic with regards to changes in HR practices.

JK Brown writes:
But if an employer can find a good employee who lacks a college degree, the employer can, all other things equal, pay less.

Why?

If you find a good employee who lacks a college degree, all other things being equal, i.e., they are as productive and value-added as a college graduate, why, outside of government, academia, and brain-dead corporations (where bureaucracy rules), would the employer pay less?

Sure a non-degreed employee may not ask for as much in salary upon hiring, but really employers who pay based on unneeded credentials are not acting very rationally or economically. On the other hand, an employer would do well to raise the wages of the non-credentialed employee once they've proven their productivity in order to retain their services.

And yet, we do see pay based on unneeded credential possession and a lagging in raising the pay of the productive non-credentialed?

jc writes:
Like some of his critics, though, I have often wondered why employers don't figure out cheaper ways of getting information about potential employees.

Sometimes when people do things that don't make sense, there's a bigger-picture, underlying rationale that's guiding action, instead of the more direct Max U directive.

For example, it's possible that tribal unity was extremely important throughout human history, and coalescing around a set of norms (whether random, e.g., some of Pinker's studies in Blank Slate, or historically derived via efficiency mandated directives of the time) was more important in the big picture (over the long run) than doing what makes rational sense in the immediate picture.

This might mean that the very folks (business and psychology professors) who showed us that traditional hiring interviews don't have much predictive value (e.g., no correlation b/w initial evaluation scores/hiring choices and future job performance) refuse to make a hire w/o...you guessed it...conducting a traditional hiring interview.

When you ask why, they say something like, "it's customary, just what we've always done, required by HR". I'm reminded of that scene from The Girl w/ the Dragon Tattoo where Stellan Skarsgård tells Daniel Craig about soon-to-be-murdered guests always accepting his invitation to come in for a drink, because their fear of violating a social norm or custom exceeds their fear that something very bad is about to happen to them. Customs are strong.

Fwiw, business professors also say "yeah we know the literature says we're biased towards candidates that are similar to us, narcissistic, etc...and that we often make worse hires with interviews than w/o conducting them...but we're objective enough to look past all that and avoid the mistakes professional hiring managers make, and our interviews are more sophisticated than those in the meta-analyses you're talking about". Possibly true. I still bet much of the reason is simple tradition.

Decisions are often a mix of the rational, seemingly irrational (but actually rational from a different, sometimes hidden perspective, e.g., long/short run, big/small picture), and actually irrational. And if the latter two are somewhat systemic (a part of human nature), then decisions and practices may not be weeded out as the herd is culled.

Perhaps in this age of Big Data, though, along w/ somewhat libertarian personality characteristics (e.g., prioritizing efficiency over agreeableness), more companies will eschew the traditional for the effective (when it doesn't violate HR or legal policy). Perhaps Compose Inc actually knows something... (But here, it's biases and what not associated w/ CVs that get thrown out.)

Conscience of a Citizen writes:

Outside of small tech businesses the amateur skill-evaluation part of this approach is doomed, though blinding school names in resumes might possibly be viable. For jobs, e.g., in logistics or accounting or HR which are about general abilities rather than narrow specialized cognitive skills like configuring cloud computing storage systems, the racial disparate impact of skills tests make them unlawful in the US. It is legal to test very narrow skills to do a very narrow job. It is effectively, though not formally, forbidden to test general skills to do general jobs. The EEOC routinely punishes employers who try to do that.

Foobarista writes:

Unfortunately for this approach, "team fit" is a big deal in most tech companies, particularly since tech people can and often do have difficult, disagreeable personalities that can end up producing more harm than good in the team. This can be especially true in startups and small companies where team members work closely with each other.

For all the talk of remote working and such things, most companies don't do it very well.

Richard writes:
Bosses say blind hiring reveals true talents and results in more diverse hires.

I really doubt that. Unlike a blind test, top colleges all practice affirmative action. The more objective the criteria for something, like running speed for example, the less diverse those selected should be.

GregS writes:

This reminds me of another story I saw a couple years ago. The Atlantic had a great article called "They're Watching You at Work" in December, 2013. There are a few paragraphs in that story that talk about how employers are trying to use analytics rather than judgment in their hiring, and the results are suggesting they hire more people without college degrees.

I immediately thought of Bryan Caplan. If good analytics can identify good job candidates in the pool of workers without college degrees, that will make it easier to get by without a degree. It could break the habit of "We won't even consider you unless you have a degree." Hopefully someone really refines "job candidate analytics" because that would really be a boon to those quality employees who get passed over. Frankly I get pretty disappointed whenever I overhear discussions about hiring decisions at my current company. People make up some pretty arbitrary (often silly) criteria for judging job candidates. There's a place for human intuition in these decisions, but it would be nice to get something a little more objective behind it.

Brian writes:

"Time will tell how well this works. If it does work well, expect to see more of it. And if that happens, the repercussions for colleges will be large."

I expect the repercussions to be close to zero. Why? Because the pool of applicants without a college degree will be much less able than the pool with the college degree. First, as Bryan repeatedly reminds us in his defense of the signaling theory, people in college are already more intelligent and better at getting along than those not in college. So even if college adds nothing, the people currently in college are simply better candidates. The idea that 18-year-olds with no college would be able to compete with 22-year-olds with a degree is ludicrous. Yes, there will always be some who excel on their own, but the percentage will be low. Second, regardless of what Bryan thinks, college really does add essential knowledge and skills. In technical fields, especially, students gain knowledge that is not easily obtained on their own. One really has to think on the margin about this issue. How will a typical 22-year-old who has worked a random job for four years compare with the SAME person at age 22 who has gone to college. The college version beats out the non-college version in almost all cases. And the discrepancy will be even larger if we compare the 18-year-old non-college version to the 22-year-old college version.

Robert Schadler writes:

As Frank Knight often wrote, motivation is very hard to assess, even while a key ingredient for economic success -- whether as an entrepreneur or employee.
Not aware of any systematic study of those highly successful people without college degrees, but there are many: from Thomas Edison, to Steve Jobs and Bill Gates and a goodly number in the DC think tank world.
And an opposite, and somewhat related puzzle, why employers are quick to pronounce someone "overqualified" as opposed to a "good deal". Likely it indicates some suspicion that the signals are distorted (will leave soon, is hiding something important, etc). But sometimes, a highly skilled person is willing to take a lower salary simply to have a job that's desirable to him or her.

Thomas Sewell writes:

Brian,

Contrary example:
How would a 22 year old with a college degree compete with a 22 year old with 4 years experience in the job a company is hiring for?

The learning curve for most jobs which require actual skills and knowledge is pretty steep for the first 4 years. How much of that is getting a 4 year degree going to be worth? Not much, I'd say.

Brian writes:

Thomas,

It depends on the job. If the 22-year-old with no college education still has the job after 4 years without extra training (i.e., more than the college grad needs), then sure, direct experience with the job is better. But hire that person as an 18-year-old with no college experience and one of two things is likely to happen: either the company fires the 18-year-old for not being able to do the job, or the company ends up having to train the 18-year-old themselves. If the latter case, the company has additional expense they'd rather not have.
Think about it. Why is there a college premium at all? From an economics perspective the answer should be obvious. The premium is an equilibrium strategy, right? It must be that the additional training costs and loss of productivity in hiring high school graduates exactly equals the premium paid for college graduates. How can it be otherwise?

David Seltzer writes:

This is not a new concept. Years ago I was hired by Paine Webber as broker. I was asked to dial for dollars as part of the hiring process. Cold calling to see how I would handle marketing to prospects. It was uncomfortable but I was hired and trained.

Miguel Madeira writes:

"I really doubt that. Unlike a blind test, top colleges all practice affirmative action. The more objective the criteria for something, like running speed for example, the less diverse those selected should be."

Words like "diverse" don't mean much by itself - "diverse" in what? Ideais? Personality? Social background? Ethnic background (I am the strong suspection that there is this last item that many think when thay say "diverse")?

An objective criteria will perhaps produce less diversity in things that are correlated with the criteria and more diversity in things that are uncorrelated with the criteria.

And in things that have a moderate (neither much low neither high) correlation with objective results, probably the blind hiring will produce more diversity (because it will remove the statistical discrimination effect): imagine that, as a rule, 70% of the individuals of the group A and 40% of the individuals of the group B are good workers; in a hiring "by signal", between a "A" and a "B" candidate, you will hire the "A" candidate; in a blind hiring there is 35% of probability (i am simplifying a bit) of "B" being the best.

TSB writes:
...why employers are quick to pronounce someone "overqualified" as opposed to a "good deal".

I suspect the hiring manager is typically thinking "Overqualified relative to myself, and therefore threatening."

TheObeseDog writes:

Having hired people before I can tell you exactly what my thought process was in passing on "overqualified" people. In this instance a Phd. with no experience for a job that would only require a bachelor's:

"Wow, this person seems great. I bet they will find this job boring and will stay just long enough to get experience to jump. If they quit in a year I have to go through hiring and training process all over again."

In short, I assessed that the expected tenure of the "overqualified" individual was much shorter.

roadrunner writes:

As colleges hand out more worthless degrees, variants on intelligence tests will become more common.

Mrs Smith writes:

Remember, not everyone without a college degree is 18, or even 22 years old. Lots of folks go to college but don't graduate and there's a lot of grey area between never been to college and a Ph.D. There are also a lot of older candidates who have many years of experience in their field, who never attended or finished college.

Those people in the grey area may have plenty of applicable knowledge and skills picked up along the way and I think this is where culling non-graduates from hiring pools is a huge mistake. In most cases, candidates aren't going to be 18 y.o. HS grads vs. someone with a Bachelor's or Master's from an Ivy, but rather, reasonably intelligent/educated candidates who might have myriad reasons for not finishing higher education vs. someone with a piece of parchment and an a$$-load of student debt.

In many ways getting a degree is an issue of privilege, and especially in today's economy, I might find a candidate who has found alternative routes to acquire education and skills to be better qualified for my hiring needs.

Daublin writes:

One possibility is that it's started to happen, but that it's a slow burn. Let me give two examples from the software world.

First, Codility is an interesting new company that does tests for job applicatonts. You tell them what sorts of skills you want to hire for, and you then send all your job applicants to first do a Codility test. If they score badly you would typically not even interview them. If they score highly, then depending on the job, you might not care much about their academic credentials.

Second, the open-source infrastructure has really taken off, especially with GitHub. One way a new programmer can prove themselves nowadays is by submitting a portfolio of pointers to their activity on GitHub. An emerging new part of that story is that there is also increasingly sophisticated analysis of individual contributions to those forums. So it's becoming possible for a budding new programmer to demonstrate that they've written X klocs of code with a Y automated quality rating.

I have no idea whether these things will take off, even narrowly in software. It seems logical that they might, though. The Internet is terribly new if you are looking at a generational time scale, and such a time scale seems appropriate when we are talking about youth education.

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