Deepak Jois – Blog

Adverse Selection in the Job Market On Thursday, April 26, 2007

Labels: economics, jobs  

Joel Spolsky wrote an editorial at Inc.com. It is an edited version of one of his articles at Joel on Software, which I can’t find a link to.(Update : Original article link is here,thanks CK!)

A lot of companies think they’re hiring the top 1 percent because they get 100 resumés for every open position. They’re kidding themselves. When you fill an opening, think about what happens to the 99 people you turn away. They don’t give up and go into plumbing. They apply for another job. There’s a floating population of applicants in your industry that apply for nearly every opening posted online, even though many of them are qualified for virtually none of these positions. So if the top 1 percent never apply for jobs, how can you recruit them?

It is Naked Economics time again. Joel has done a fantastic job of describing in layman terms, what economists call ‘Adverse Selection’.

Adverse selection or anti-selection is a term used in economics and insurance. On the most abstract level, it refers to a market process in which bad results occur due to information asymmetries between buyers and sellers: the “bad” products or customers are more likely to be selected.

In this case the information asymmetry exists because the company/firm has no information about the relative quality of the applicants whose resumes they are receiving, whereas the applicants are usually better informed about their standing in the job market, which could be measured by the number of firms which offer them a job. Hence companies are actually worse off because bad applicants are more likely to be selected, because they would be the ones most likely to apply in the first place.

Reality ofcourse is not that simple, and there are many ways to avoid the problem of adverse selection. Joel’s article has some good advice. But the one thing that you definitely cannot rely on is to put out an ad and wait for the resumes to float in.