Professional job interview 'proxies' and adverse selection

One of the examples of adverse selection that I use in my ECONS102 class is the adverse selection experienced by employers when trying to find high quality workers. Adverse selection arises when one of the parties to an agreement (the informed party) has private information that is relevant to the agreement, and they use that private information to their own advantage at the expense of the uninformed party. In the case of an employment situation, the private information is about the job applicant's quality or productivity as a worker. The worker knows this, but the employer doesn't. That could lead to a pooling equilibrium, where the employer has to assume that every job applicant is low quality, and would consequently only offer a low wage. High quality workers won't work for a low wage (because they know that they are worth a lot more to the employer), so they would turn down any job offer. The labour market for high quality workers fails.

Of course, in the real world that doesn't happen. That's because employers have adopted screening methods, in order to reveal the private information (about whether a job applicant is high quality or low quality). Specifically, the job interview is a screening method. That creates a separating equilibrium, where employers can separate the high quality job applicants from the low quality job applicants. The job interview is effective as a screening tool, because any applicant can easily lie on a CV, but it is a lot harder to lie in an interview. Or is it? Business Insider reported earlier this week:

Some job candidates are hiring proxies to sit in job interviews for them — and even paying up to $150 an hour for one.

In a recent Insider investigation into the "bait-and-switch" job interview that's becoming increasingly trendy, one "professional" job interview proxy, who uses a website to book clients and keeps a Google Driver folder of past video interviews, said he charges clients $150 an hour...

The "bait-and-switch" interview works like this: a job candidate hires someone else to pretend to be them in a job interview in hopes they will secure the job. When the job starts, the person who hired the proxy is the one to show up for work...

With an increasing amount of job interviews happening over the phone or video chat due to remote work environments, the "bait-and-switch" trend is getting easier, experts told [Insider's Rob] Price. 

If employers can no longer be sure that their job interviews are working as screening tools, then job interviews no longer lead to a separating equilibrium. Employers (and job applicants) would be back at the pooling equilibrium, where high quality workers wouldn't be able to be offered high wages (because they can't be easily distinguished from low quality workers).

However, screening isn't the only tool available. The high quality job applicants can use signalling to reveal the private information about their quality as a worker. An effective signal is costly, and is costly in such a way that the low quality job applicants would not want to attempt it. Education credentials are a form of signalling - they are costly to obtain, and potentially more costly for low quality workers, who might take longer to get a qualification, or might have to work harder to do so (and either of those situations makes a qualification less attractive to them).

Contrary to the hopes or expectations of pundits like Bryan Caplan (whose book The Case Against Education I reviewed back in 2019), education as a signalling tool may actually become more important. If job interviews are ineffective because of proxies, I can easily imagine that the whole human resource management battery of assessment tests will also be ineffective, along with various skills assessments. Unless employers (or HR consultants) can come up with some method of credible identity verification at the time of the interview or assessment, employers may become increasingly sceptical of those screening methods. And that only leaves signalling, of which education is potentially the most important type. It really illustrates just how important it is for students to understand the signalling value of their education.

[HT: Marginal Revolution]