Tuesday, December 28, 2010

Adverse Selection

The notion of adverse selection traditionally belongs to the realm of Economics or Banking. The Wiki definition of adverse selection (so that we are on the same page) is:

Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or customers are more likely to be selected.
Interestingly enough, this term has recently been borrowed by People Management sciences in studies of labor markets. The basic assumptions are the same: information is asymmetric, it is imperfect and the labor market is heterogeneous. Aggravated by the amount of applications, companies often make wrong recruitment choices, since the screening and background check efforts are well beyond their capacity. At the same time, applicants are likely to apply for jobs, for which they are overqualified or underqualified, which skews the entire talent picture and throws the employer into the trap of guessing.

Boyle (1999) identified four types of candidates from adversely selected pools:
  • The unhappy (and thus probably not a desirable employee); 
  • the curious (and therefore likely to be a job-hopper); 
  • the unpromotable (probably for a reason); and 
  • the unemployed (probably for a worse reason).
Nowadays that we are striving for leaner functions, it is highly improbable that the companies are able to avoid the negative consequences of adverse selection should they not resort to the services of various labor market intermediaries (LMIs). Examples of such may be background check agencies, executive search firms, career services at academic institutions, temporary placement firms etc., i.e. an agency reducing the amount of uncertainty in the process of candidate selection.

LMIs in one form of another have existed for thousands of years, but those were largely informal. These days such processes and services are highly formalized and higher proportions of those are moving into online domains. Online recruitment is now a reality, and such giants as monster.com or hotjob.com boast millions of resumes on file, and those portals are able to provide both parties, employers and seekers, with personally-tailored information at low cost, which is normally shifted onto the employer. The problem comes when the employment decision is to be made, because it is somewhat similar to getting married after a few weeks of online dating: you do not want to end up with an undesirable person next to you even if it is going to be a short engagement, but at the same time there is a lack of time and resources to do proper screening and matching. Then you would more to more expensive employment agencies or even contingency firms, but is that really the answer to the problem?

There is little research done on LMIs up to date. I am certain that we are going to see more literature on the topic soon, but, as we know, academic knowledge is always lagging behind - what is there that we have to do now?

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