Mismatch Matters: Impacts on Starting Wage and Separation
Job matching characterizes how an individual’s cognitive abilities, interests and personality traits match the requirements or success in a particular job and match quality varies across working experience and for workers who enter the job market from non-employment. Both job seekers and firms decide whether to match based on their perception of fit of skills and preferences to the job. After hiring, both the worker and firm observe the productivity of the pair and make more precise decisions on future wages and continued employment based off these observations. A recent paper published in the American Economic Review by Fredriksson, Hensvik and Skans provides evidence on the penalties felt by workers as a result of mismatch. The efficient allocation of workers across jobs is critical for labor productivity and drives long run economic growth.
For workers with little experience or who are returning from unemployment, it is more difficult for firms to differentiate workers of varying fit. When job seeking is costly in terms of lost time in job searching and the opportunity cost of lost wages while searching, inexperienced workers are further driven to match quickly with less incentive for job matching. When firms are left unable to differentiate quality matches, they are unable to price job fit into starting wages.
Fredricksson, Hensivk and Skans studied the effect of match quality on a starting wage, and likelihood of job separation.To measure match quality, they included four different measures of cognitive skills and four measures of non-cognitive skills. The cognitive skills are based on four subtests that measured inductive skill, verbal comprehension, spatial ability and technical understanding. The non-cognitive measures were based on a 20-minute interview with a trained psychologist and captured social maturity, psychological energy, personal drive and emotional stability. They measured match quality by comparing the talent of entrants to the talents of tenured workers in the same job because tenured workers are likely to be selected as having the right set of talents for the job.
Mismatched job seekers with less than four years years experience received a wage penalty about a tenth of the size of the penalty for mismatch then that received by experienced workers (five or more years). This effect was similar in magnitude when comparing job seekers from unemployment to job-to-job movers. In other words, inexperienced workers or workers coming from unemployment were penalized less for poor job matching and the incentive for job matching is much higher for experienced job seekers. The combination of firms’ difficulty in differentiating job seekers and the resulting lack of incentives for seekers to find a quality fit leads to higher likelihood of mismatch for inexperienced job seekers.
While inexperienced job seekers may not feel the mismatch penalty on their starting wage, mismatch leads to both a higher likelihood of separation and smaller wage growth. For inexperienced workers, an increase in mismatch by a standard deviation raises separations by 2.2 percentage points, corresponding to a tenth of the average separation probability for inexperienced workers. This increase in separation probability is a result of the mismatch not being priced into the initial wage and separation results when the cost of the mismatch being greater than the separation costs. Supporting this idea, workers with at least seven years of experience (whose mismatch is priced into their starting wage) do not have an increased likelihood of separation. This result is again echoed in comparing the increased likelihood of separation for workers entering from unemployment to job-to-job movers.
The differing impacts of mismatch across experience groups results from the information available at hiring. Matches for inexperienced workers are less informed and as a result mismatch cannot be priced into the initial job offer but is factored in to a greater extent down the road in the increased likelihood of separation. On the other hand, job matches for experienced workers are formed with greater certainty and mismatches are penalized in entry wages, but do not result in increased probability of separation. The inability to observe match quality for job applicants is a fundamental problem in the job market and increases in ability to screen applicants for job fit would result in decreases in separation and increased quality of job matching overall.
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