06 February 2012

Firing Aversion: Naming the Puppy

No, this is not literally about puppies. Though Mrs SB7 and I are in the process of looking for one.
EconLog | Bryan Caplan | Naming the Puppy: Firing Aversion and the Labor Market

In fiction (and "reality" television), firing workers almost seems fun. How many times has Mr. Burns gleefully hissed, "Fire than man, Smithers!"? In the real world, though, bosses dislike being the bearer of bad news. They feel guilty when they let someone go. So guilty, in fact, that some hire consultants to help them fire people. To coin a behavioral econ phrase, most employers feel "firing aversion."

How does firing aversion play out in the real world? For starters:

1. Firms often fail to hire workers who would be profitable in the short-run. [...]

2. Signaling matters more. [...]

3. Outsourcing looks better. [...]
(1) I had a professor at ND who said he left industry for academia specifically because it meant he would never have to fire anyone again.

(2a) Wouldn't giving more workers fixed-length contracts ameliorate these problems? You still have to deliver the bad news that the contract won't be renewed, but it seems a lot better because the frame is that you're declining to give the person something, rather than taking away something they see as theirs.

(2b) Speaking of which, "your job" is only "yours" in the sense that "your girlfriend" is "yours." Employment is a relationship between two parties, not the possession of one of them. If more people accepted that we would have a lot less whining about foreigners "taking our jobs."

(2c) I assume there are legal problems standing in the way of (2a) which I do not know about.

(3a) The mail clerk in our department recently "failed to pass her employment probation." I have a cousin who similarly failed a probationary period at a hardware store. Why is this not more common?

(3b) Someone — Ryan Avent? — once said that labor markets in America were odd because the decision to hire someone preceded all discussion and negotiation of salary.  Relative to the current status quo with salary offers following employment offers, and an alternative where salary is agreed before a final offer is made, would determining salary after a probationary period make more or less sense?

(3c) I suppose that question depends on wether you're the hirer or the hiree, and wether the hiree is leaving another job or is unemployed, but I'll leave it as is.

(3d) I hypothesize that the situation Avent (?) describes persists because the results of the salary negotiation will make only a very small difference to the employer's cost of taking on the new hire, and so they have little reason to negotiate compensation with multiple candidates and then decide which one to hire.

Also, the employer's ability to predict the new hire's productivity is very imprecise, so it is very difficult to select the candidate who minimizes compensation costs while maximizing worker production. As a result, you might as be willing to make an employment offer despite the uncertainty in their compensation because that is dwarfed by your uncertainty about their production. Why invest a lot of effort over $2,000 in salary and an extra sick day when the total cost of your new hire is going to be $200,000 annually and you estimate they will produce $250,000 in revenue, give or take $100,000?

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