Almost all retailers run background checks on prospective employees—one of the many obstacles for people who were formerly incarcerated and are now trying to find a job. For other job seekers, a drug screening for marijuana might cost them a position even in states where recreational use is legal. This summer, the Body Shop will become the first large retailer to embrace a different approach, called “open hiring.” When there’s an opening, nearly anyone who applies and meets the most basic requirements will be able to get a job, on a first-come, first-served basis.
The company piloted the practice, which was pioneered by the New York social enterprise Greyston Bakery, in its North Carolina distribution center at the end of 2019...
The results were striking: Monthly turnover in the distribution center dropped by 60%. In 2018, the Body Shop’s distribution center saw turnover rates of 38% in November and 43% in December. In 2019, after they began using open hiring, that decreased to 14% in November and 16% in December. The company only had to work with one temp agency instead of three.I can immediately see two reasons why this might be a good approach for The Body Shop, and neither reason has anything to do with the 'halo effect' of appearing to be a good employer. Both reasons have to do with wages (which, if you read the story, you will notice are not mentioned anywhere).
First, consider a search model of the labour market. Each time a job is filled, this creates a match between the employer and a worker, and that match creates a surplus (the employer receives some additional profits from employing the worker). The employer and the worker share the surplus. How it is shared depends on their relative bargaining power. If the employer has less bargaining power and the worker has more, then the worker can demand a bigger share of the surplus, and wages will be higher. On the other hand, if the employer has more bargaining power and the worker has less, then the employer can offer a lower wage, and wages will be lower.
Now, think about The Body Shop's open hiring. Suddenly, they are willing to accept applications from almost anyone. Applications flood in. The Body Shop has lots of potential workers to choose from. If Worker A isn't willing to accept the wage that The Body Shop offers, then they can simply move on to Worker B, or Worker C, or any of the countless other applicants. Can you see that this 'open hiring' shifts the bargaining power in favour of The Body Shop? They can offer lower wages because the applicant pool is much larger than before.
Second, consider asymmetric information and adverse selection. Workers know how productive they are (more or less), but the employer doesn't know - this is private information. The employer usually wants to hire the most productive workers. So, they try to reveal the private information through screening. The background checks, and job interviews, and psychometric tests and whatever else that human resources people dream up are all ways of screening job applicants in order to determine which of them are most likely to be highly productive workers for the employer.
Now, consider what happens if you remove the screening tools like background checks. Now the employer can't tell the more productive and less productive applicants apart. Basically, they would have to assume that all applicants are the same, and the safer assumption to make is that they are all of the less productive type - we refer to this as a pooling equilibrium. Normally, we'd consider a pooling equilibrium to be bad - employers want to tell the more productive and less productive workers apart. However, if an employer had to assume that all workers were of the less productive type, then their best option is to offer a lower wage (why pay a high wage to workers who are likely to have low productivity?).
So, now you can see that there are two good (albeit cynical) reasons to see why The Body Shop's 'open hiring' philosophy makes good business sense. That's not the end of the story though. Background checks are a fairly imperfect screening tool, and even job interviews and psychometric tests can get things wrong. A better screening tool is to let the worker do some work, and observe their productivity. If the employer can then easily fire any less-productive workers, then this may be a more accurate way to identify the most productive job applicants.
In the U.S., many states have 'at-will employment laws', which basically mean that the employer can fire a worker at any time for any reason (there are exemptions, and the actual laws vary by state). It is interesting to note that North Carolina is a state with at-will laws, and North Carolina is where The Body Shop's distribution centre that trialled 'open hiring' is located.
The Body Shop may well have gotten a lot of positive press with this move, but it's likely that is not the only benefit they have enjoyed from 'open hiring'.
[HT: Marginal Revolution]
Never underrate the employment at will backstop.
ReplyDeleteRecently re-read the 1980s literature on efficiency wages for a paper on deposit insurance. Linked to corporate governance aspects and how common is employee crime.
The employment at will aspects and loss of reputation if sacked is really glossed over in a otherwise sophisticated literature written by the best and brightest young economists of the time.
Overseas users take up the efficiency wage literature without adjusting for greater employment protection laws.
Practical upshot of efficiency wages is Lazear developing personnel economics
I agree that efficiency wages is relevant, and I was going to comment on it in this post. However, that is because the efficiency wage literature notes that offering better conditions attracts more applicants, and increases productivity, etc. In this case, the open hiring process increases applicants, but likely lowers wages and conditions.
DeleteAlso as part of my work on deposit insurance, I looked at a paper by John umbeck. A great little article explaining how the finance industry gets around adverse selection through direct and indirect lending.
ReplyDeleteDirect lending involves serious -looking Conservative people like banks means that you will get rejected unless you are of good quality and that will count against your credit rating. So you don't apply because you know you will be rejected
Then there is indirect lending through outfits with signs on the door like "no credit checks" and instant finance. This is a clear signal that the interest rate is high but is only worth the time of high risk people who would benefit from a credit check.
Saying on your door that you will not scrutinise applicants that much will only attract people who have nothing to gain from the background being scrutinised but would be willing to accept a lower wage in the hope of being given a chance.
Ed Lazear also wrote about the advantages of hiring risky workers in his personnel economics textbook, which is a fascinating book to read. He pointed out that if you hire a risky worker, if it turns out to work as a good credit, good for you but if it doesn't turn out well, just fire them.
The other way you get around not screening your workers is just pay them not much than promote them if they good. That's the standard response to employment protection laws. Have trial wages that are just next to nothing and a promotion after 12 months like in graduate recruitment programs.
Last sentence of the third paragraph should read high risk people who would not benefit from a credit check.
DeleteI might have to check out the Lazear book. Is it this one?: https://www.amazon.com/Personnel-Economics-Wicksell-Lectures-Edward/dp/0262121883/
DeleteOne of many he wrote. He writes excellent survey articles too. He is a fine writer.
ReplyDeleteI heard somewhere that the drafts of his book online somewhere too.
He said he invented the whole field because his MBA students falling asleep in his class because he was giving the conventional labour economics texts,
They sat up and paid attention when he started exploring why you recruit people, who you layoff first, booty of train, who do you promote, who do you motivate through promotions, and so on/
By far the best managerial text is by Luke Froeb. Only at 300 pages long, based on problem-solving, and he wrote it because he Dean warned him that he might have to fire him because all of students gave him about a valuation.
He argues that market failures are profit opportunities and the one lesson of businesses how to move assets from lower value uses the higher value uses. He has an excellent blog called managerial economics that is thousands of posts about his book