The Signaling Role of Promotions: Further Theory and Empirical Evidence

[Excerpt] An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium-sized firm in the financial-services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal

The Labor Market Effects of Employer Recruitment Choice

[Excerpt] I analyze employer recruitment decisions using a dynamic, discrete-choice structural model that I estimate on a sample of clerical workers from the MCSUI, a large cross section of establishments in 4 metropolitan areas of the U.S. In the model, employers choose either informal recruitment methods (which generate a small but select applicant pool from which the employer can hire quickly) or formal methods (which create a large but less select applicant pool which the employer must screen intensively, delaying hiring times). I study the effects of 3 counterfactual simulations on recruitment strategies, starting wages, and vacancy durations: a wage subsidy, a policy designed to improve information about prospective matches, and an increase in the heterogeneity of prospective matches. I show that the effects of exogenous policy or environmental changes can be decomposed into “pure wage effects” that affect the wage offers employers post, holding constant their recruitment strategies, and “recruitment-wage effects” that involve changes in recruitment methods. The results show that changes in recruitment strategies represent an important channel through which changes in the economic environment affect the starting wages and vacancy duration for new hires

Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions

Applying a simultaneous-equations estimation approach that accounts for both worker and firm behavior, I show that six alternative promotion models can be empirically distinguished to a greater extent than previously thought. I show that classic tournaments, market-based tournaments, and performance standards can be sharply distinguished when promotions induce worker effort. I also show that market-based tournaments with effort choices can be sharply distinguished from those with human capital investments. A key insight is that an empirical test can be based on the “opposing responses” property whereby workers and firms adjust their choice variables in opposite directions when the stochastic component of worker performance changes. Finally, I propose a new approach – also requiring simultaneous equations – for empirically distinguishing between classic tournaments and market-based tournaments with human capital investments, showing that the two models differ in their predictions regarding the average wage between job levels.tournaments; promotions; relative performance; internal promotion competitions; wage spreads; tests of tournament theory

Promotions and Incentives in Nonprofit and For-Profit Organizations

[Excerpt] Using data from the 1992–95 Multi-City Study of Urban Inequality, an employer survey, the authors document a new empirical finding that workers are less likely to receive promotions in nonprofit organizations than in for-profit firms. The study also uncovers evidence that wage increases associated with promotion were of comparable magnitudes in the two sectors, as was the potential for within-job wage growth; nonprofits were less likely than for-profits to base promotions on job performance or merit; nonprofits were less likely to use output-contingent incentive contracts to motivate workers; and the observed difference in promotion rates between the nonprofit and for-profit sectors was more pronounced for high-skilled than for low-skilled workers. The authors also propose a theory, based on the idea that nonprofit workers are intrinsically motivated to a greater extent than are for-profit workers, that potentially explains the broad pattern of evidence they uncover

The Signaling Role of Promotions: Further Theory and Empirical Evidence (CRI 2009-008)

An extensive theoretical literature investigates the role of promotions as a signal of worker ability. In this paper we extend the theory by focusing on how the signaling role of promotion varies with a worker’s education level, and then investigate the resulting predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium-sized firm in the financial-services industry. Our results support signaling being both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal

Teams, Autonomy, and the Financial Performance of Firms

[Excerpt] I estimate a structural model of teams, autonomy, and financial performance, using a cross section of British establishments. My findings suggest that team production improves financial performance for the typical establishment but that autonomous teams do no better than closely supervised or non-autonomous teams. I find that unobserved factors increasing the propensity to adopt teams are positively correlated with unobserved determinants of financial performance, and that unobserved factors increasing the propensity to grant teams autonomy are negatively correlated with unobserved determinants of financial performance when teams are adopted

Waging the War for Talent: Do Recruitment and Screening Strategies Raise Employee Performance?

We use data from the Multi-City Study of Urban Inequality to provide an empirical answer to the question, “Do recruitment and screening strategies raise employee performance?” Our approach differs from previous empirical work in that we allow for changes in screening behavior to accompany changes in recruitment behavior. In the end, our results are consistent with those of the previous literature that ignores the auxiliary effect of recruitment through screening, in that we find no effect of recruitment methods on worker performance

Doing the Right Jobs Right: Managers’ Attributes and Activities at Borders

[Excerpt] This article starts with a simple value proposition: that companies can save large sums and gain competitive advantage by utilizing more fully their own data on the determinants of profit. In this article, we describe how we used a variety of statistical methods (correlations, simple regressions, multiple regressions, and decompositions) to help one company, Borders, gain competitive advantage by learning from itself

Employer Recruitment Strategies and the Labor Market Outcomes of New Hires

[Excerpt] The results in this paper suggest, among other things, a strong association between recruitment choices and starting wages. The theoretical framework motivating the empirical analysis is a wage-posting game in which firms make wage offers and choose recruitment strategies while recognizing a tradeoff between hiring speed and match quality. Introducing this methodological framework to the recruitment literature, I present new evidence on employers’ choices of recruitment methods to answer the questions, How do employer recruitment choices vary by firm and vacancy characteristics and the skill requirements of jobs, and How do vacancy duration and starting wages vary with recruitment choices