Recruitment & selection: Hiring the right workers 1. The supply side of the labour market 1. The supply side of the labour market 2. Screening: Hiring the right workers 2. Screening: Hiring the right workers 3. The availability of workers 3. The availability of workers 4. Staffing policy in international businesses 4. Staffing policy in international businesses

Motivation Recruitment & selection Recruitment & selection …organisations now appreciate that their survival depends on the quality of their people.. …organisations now appreciate that their survival depends on the quality of their people.. Search & selection are costly Search & selection are costly Direct costs Direct costs Indirect costs Indirect costs

The supply side 1. Human capital model 1. Human capital model –Understanding the educational (& training) investment decisions of workers (& firms) –Costs & benefits arise over time –Incremental decision over time –Decision rule: invest if expected discounted future stream of benefits > …costs

W W(T) e f dc ba gW(M) W(O) KtKt Age (time) Fig 1 Investment, income streams & the rate of return t0t0 t1t1 t2t2

Figure 2 Actual rates of return Social rates of Return Private rates Of return CountrySecondaryHigherSecondaryHigher Australia Canada Denmark France Germany Great Britain Italy New Zealand Spain US Psacharopoulos (1994)

The measurement & determinants of rates of return (a) Net Present Value (a) Net Present Value (b) Internal Rate of Return (b) Internal Rate of Return (c) Earnings functions (c) Earnings functions –Problems: data; omitted variable bias, selection bias - Education & experience always statistically significant

2. Signalling Human capital model: Human capital model: –Education causes worker productivity to rise –Correlation versus causation Alternative view – signalling & screening Alternative view – signalling & screening

Screening Why dont all workers invest in a high level of education? Why dont all workers invest in a high level of education? Evidence: HC versus screening – ability bias Evidence: HC versus screening – ability bias –(a) include IQ and schooling in wage equation –(b) analysis of identical (monozygotic) twins –(c) instrumental variables –(d) analysis of the self employed

3. Screening: Hiring the right workers Empirical support for Human capital model Empirical support for Human capital model Firms: Selecting skill standards Firms: Selecting skill standards –General principle

Hiring standards Thus: Thus: Alternatively: Alternatively:

The production technology 1. Production is independent across workers 1. Production is independent across workers 2. Workers productivity depends on the skills of other workers 2. Workers productivity depends on the skills of other workers

Output No. of graduates employed No. Of SL Fig Interdependence in output of two types of workers

The production technology 3. Interdependence between workers & interaction with capital 3. Interdependence between workers & interaction with capital Output Labour cost Capital cost Total cost Cost/Output Old machine Skilled4£40.00£5.00£45.00£11.25 Professional6£64£5.00£69.00£11.50 New machine Skilled8£40.00£11.00£51.00£6.38 Professional12£64.00£11.00£75.00£6.25 Skilled W=£5.00; Professional W=£8.00

Hiring workers How many workers to hire? How many workers to hire? –The firm should continue to hire workers so long as the increment to profit brought about by hiring the worker is positive. Should firms hire risky workers? Should firms hire risky workers? –If they have the same expected value –If expected value is less

2. The availability of labour Search process- See Figure Search process- See Figure Agents have imperfect information Agents have imperfect information quality of jobs (w) quality of jobs (w) location location Information on a worker Information on a worker Inspection Inspection Experience Experience

Decisions (i) Choice of search technology (i) Choice of search technology internal v. external sourcing internal v. external sourcing (ii) Choice of search intensity (ii) Choice of search intensity no. of applicants to interview no. of applicants to interview time - interviewing, testing, etc. time - interviewing, testing, etc. (iii) Decision rules (iii) Decision rules sequential search sequential search optimal stopping rule - reservation payoff optimal stopping rule - reservation payoff

Stop searching & hire If z z* If z z* If z < z* If z < z* Reservation payoff, z* Reservation payoff, z* z* = -c + ( f \ + r)( (z*)) z* = -c + ( f \ + r)( (z*))

Reservation payoff, z* Z* = Z*(c, f \ r, q + p - w) Z* = Z*(c, f \ r, q + p - w) Firms are more selective if Firms are more selective if applicant arrival rate increases applicant arrival rate increases costs of search decrease costs of search decrease quality of match increases quality of match increases

4. Staffing policy in international businesses Types of policy Types of policy –(a) Ethnocentric policy – key management positions filled by parent-country nationals E.g. Procter & Gamble, Philips, Matsushita, Toyota E.g. Procter & Gamble, Philips, Matsushita, Toyota –(b) Polycentric approach Host-country nationals staff subsidiaries Host-country nationals staff subsidiaries Parent-country nationals – key positions at headquarters Parent-country nationals – key positions at headquarters

4. Staffing policy 3. Geocentric approach 3. Geocentric approach –Recruit the best people for key jobs regardless of location & nationality Staffing policy should be consistent with company strategy Staffing policy should be consistent with company strategy