Alternative to the Human Capital Model Signals, Sorting, Screening

1. High MRP = $4 Low MRP = $2 Alternative to the Human Capital ModelSignals, Sorting, Screening Two equally sized groups in the population What will be workers be paid if firms cannot observe MRP?

2. High MRP = $4 Low MRP = $2 Alternative to the Human Capital ModelSignals, Sorting, Screening Two equally sized groups in the population 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

3. High MRP = $4 Low MRP = $2 Alternative to the Human Capital ModelSignals, Sorting, Screening Two equally sized groups in the population What happens to wages if one firm can observe MRP?

4. Screening Methods Firm wants to know who will be a productive, honest, reliable, motivated, innovative worker Needs cheap mechanisms to sort workers

5. Firm Loss from Theft by Employees Screening Methods Bureau of National Affairs Annual estimate $15 – 25 billion US Chamber of Commerce Annual estimate $40 billion Annual loss from street crime: $4 billion

6. Screening Methods Illegal: Sex, Race, Religion, National Origin, Ethnicity Marital Status, Disability (limited) Age (limited), Arrests, Citizenship (limited)

7. Drug Tests Screening Methods 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

8. 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

9. 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”

10. Screening Methods 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 25% reportedly fail the Stanton Honesty Test http://www.rcsservicesinc.com/home.asp

11. 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

12. 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?

13. 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?

14. 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

15. Screening Methods Evidence regarding education as a screening device • College dropouts earn the same as those who never went to college • Rising education requirements for low-skill jobs • Education is a very expensive screening device • Self-employed have similar education levels as employees