Transcript Alternative to the Human Capital Model Signals, Sorting, Screening

Alternative to the Human Capital Model
Signals, Sorting, Screening
Two equally sized groups in the population
High MRP = $4
Low MRP = $2
What will be workers be paid if firms cannot observe MRP?
Alternative to the Human Capital Model
Signals, Sorting, Screening
Two equally sized groups in the population
High MRP = $4
Low MRP = $2
How much would a firm be willing to pay to know MRP?
Let x be the screening cost
0.5*(4) + 0.5*(0) = 0.5((3+x)) + 0.5x
$0.5 = x
Alternative to the Human Capital Model
Signals, Sorting, Screening
Two equally sized groups in the population
High MRP = $4
Low MRP = $2
What happens to wages if one firm can observe MRP?
Screening Methods
Firm wants to know who will be a productive,
honest, reliable, motivated, innovative
worker
Needs cheap mechanisms to sort workers
Screening Methods
Firm Loss from Theft by Employees
Bureau of National Affairs
Annual estimate $15 – 25 billion
US Chamber of Commerce
Annual estimate $40 billion
Annual loss from street crime: $4 billion
Screening Methods
Illegal:
Sex,
Race,
Religion,
National Origin,
Ethnicity
Marital Status,
Disability (limited)
Age (limited),
Arrests,
Citizenship (limited)
Screening Methods
Drug Tests
It is estimated that 35-40% of major U.S.
organizations use drug testing, & about 15% of
applicants test positive
Most screening tests cost about $30 per test, while
most confirmatory tests are about $100
Screening Methods
Lie Detectors
• ~2 million per year in 1980s
• Employee Polygraph Protection Act (1988)
prohibited the use of polygraph tests in most
instances
• Illegal in 22 states
• Expensive
Screening Methods
Integrity (Honesty) Tests
• 40% of Fortune 100 use some form of
psychological test; not all honesty tests
• 5 million/year (1990s)
• Average Cost : $12-$15 (much cheaper
than lie detector)
• “Tests the potential for dishonesty, theft, and
other deviant behaviors”
Screening Methods
25% reportedly fail the Stanton Honesty Test
Reported Results from RCS test
• 6.1 % Admit to Workers Comp Fraud
• 10.8 % Admit to Current Drug Abuse
• 6.6 % Admit to Theft Behavior
• 7.1 % Admit to Dependability Problems
• 3.1 % Admit to Violent Behavior
http://www.rcsservicesinc.com/home.asp
Are these tests Valid?
• Companies report decline in theft from use
• False positives costly?
• False negatives costly?
If tests have few false negatives, they may
be cost effective, even if they have many
false positives
Screening Methods
Sample questions
If you saw someone stealing on the job, would you
turn that person in to the boss?
Is stealing from one’s job a common occurrence?
Do you think people who steal do it because they
always have?
Is it all right to bend company rules as long as it
does not become a habit?
Is it all right for employees to use a sick day for
reasons other than illness?
Screening Methods
Sample questions
Are you always completely truthful with yourself?
Did you ever cheat in school?
Do you ever worry about what other people think
of you?
Would you return money to a store if a clerk gave
you too much change?
Have you ever wished you could change
something about yourself?
Have you ever made a mistake on the job?
Screening Methods
Can education be used as a screening device?
Assume if education  e*
High MRP = $4
Pay W = $4
Assume if education <e*
Low MRP = $2
Pay W = $2
Assume MP does not change with years of schooling
Screening Methods
Evidence regarding education as a screening device
1) College dropouts earn the same as those who
never went to college
2) Rising education requirements for low-skill jobs
3) Education is a very expensive screening device
4) Self-employed have similar education levels as
employees