Articles eng

Is it worth to hire "cheap" employees?

Firms aggressively hire workers who ask for the highest pay. Hiring the most expensive workers actually pays off.
In a simplistic way, the hiring market looks like this: firms publish wages and effort requirements, and workers either take the job or they don't (and vice versa). Under such conditions, it can be assumed that workers demand a wide range of wages, and firms simply hire those who will work for the lowest price (because there is no need to overpay to win the goodwill of workers, because workers are only required to make the required effort).

In fact, however, organizations rarely publish data on the level of effort required, especially in terms of fair value per hour. Under such a contract, workers compete fiercely for jobs, offering to work less and less. But firms aggressively hire workers who ask for the highest pay. Hiring the most expensive workers actually pays off because these workers typically choose higher levels of effort, "compensate" the firm for a "gift" in the form of high wages. This is confirmed by experiments (hereinafter I use the book: Behavioral Game Theory Experiments in Strategic Interaction by Camerer, Colin). These results can be interpreted as firms realizing that it is beneficial for them to share productivity benefits from highly motivated workers, which is often observed in real conditions.

As a rule, it is through personal interaction with each employee when this employee puts in enough effort, firms often offer a "raise in salary", but if the efforts are disappointing (compared to the measured expectations of firms), the employee is "fired" (rather than rehired).  The result is a two-tier labor market in which some workers and firms are constantly paired, workers work hard and firms pay them well, and other firms offer low wages to the unpaired. That is why there will always be an excess supply of workers on the market, who, as a rule, belong to the second category.

If company wants to increase the productivity and the level of return from the work of employees and their high motivation, then this can only be achieved by paying high wages. The results of many experiments have proven exactly this paradigm, penalties work much worse. They can and should be used only in conjunction with a system of bonuses and material incentives!

A close examination of successful high-tech start-ups shows that the “soft” gift exchange model can work well in practice. Baron, Hannan, and Burton classified 175 Silicon Valley firms into several organizational structure categories and followed their development over several years in 1990s. About one-fifth of firms used a “growth and commitment plan,” in which the basis for hiring and retaining was the fit of the person to the “community” of the company and high wage levels, workers were controlled and coordinated by colleagues and corporate culture (rather than constant monitoring or formal processes). Most CEOs believed that the above "social" type firms would be the first to leave. In fact, they were the most successful (i.e., the fastest to market).

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