> I show that fi rms bid excessively for the pool of incumbent workers at the expense of trying out new talent. (...) This problem is most severe where information about talent is initially very imprecise
This is nothing else than the Lemon effect at work.
The Lemon effect (first discussed in a paper from 1970) appears in markets where buyers know much less about goods being sold than sellers.
When the probability of buying a bad product is high, buyers only offer to pay the lowest price. Sellers of bad products will sell at that price, but not sellers of good products. Therefore, after a short while, all good products are pushed out of the market and all that's left are duds (lemons).
That explains why employers are willing to pay more for incumbent workers: uncertainty about an incumbent workforce is much less than for "new talent", because the former is vetted by their current employers and new talent is, well... new.
I think that the "overpaid CEO effect" talked about by Terviö via Cowen is similar to and related to the "lemon effect", but I'm not sure I'd go as far as to say that it is the lemon effect. If I were to oversummarize the two effects, I'd summarize the lemon effect as "an abundance of lemons depressing prices" and the overpaid CEO effect as "an abundance of lemons raising prices".
I think the latter summary should read: "if determining the 'lemon-ness' of a product has a high cost, it lowers the drive for finding more non-lemons and increases both the price and tenure of the existing ones"
(Not sure if that makes sense in _your_ example, but thats how I read the paper)
There's a somewhat similar effect in other segmented markets. (I hope segmented is the right word here.)
In areas with rent control, the bits of the property market that are less restricted tend to be pricier, because they have to absorb all the excess demand.
I think we're seeing a shift in this circumstance though. A central tenant of the Lemon effect is that it "appears in markets where buyers know much less about goods being sold than sellers". With regard to consumers, we have far more information available than ever before, and not in the most basic sense like spec sheets and feature lists. I'm referring to social intelligence, which provides far more subtle details.
We are individually connected to more people than we have ever been in the past. As we, collectively, begin to share more and more of our experience in the open on the internet, the data set from which we can assess the satisfaction of a user base grows larger and larger.
It has become trite to say that "big data" is where it's at for 2012, but I think we've all become a little bit numb to what that means. I would consider issues like the Lemon Effect to be "big problems". There's a very real possibility that we could solve this problem in the near future. That's pretty exciting.
Yes, but there's a critical difference. New cars are the most expensive (ignoring restorations) with the most well-understood value, then they depreciate over time. With tech workers the opposite is true.
With tech workers it's always tough to know, though, right? The average quality goes up, but so does the variation. What makes it tougher is the average non-technologist has a hard time quantifying technology people. "This one is good, but 2x good? 5x good? 10x good? 10x good for the task at hand?
"
"There's no shortage of smart, hardworking engineers. There's a shortage of smart, hardworking engineers willing to work for very little money." ~ David "Pardo" Keppel
The Job market does not clear because it is not a market. The information is hoarded by one group and hidden from the other.
Creative souls can come up with tools to address issues raised here.
Workers can pay for the ability to prove themselves, by accepting lower wages for a period in return for marketable experience, and the right to publish some of the results as open source.
And longer term salary contracts are available, for example bonus schemes where the worker has to stay a certain number of years to collect.
I love this because if it's true it means that as a proven employee I will be overpaid, and that as a hiring manager I will have less competition for young talent (can't say I really feel that holds up, but there may be some SV bias in my hiring experience).
But as a hiring manager if you pay all your new employees the same low wage, you'll still have to pay for that first year of coding but a soon a they can the non lemons will move on
Your job is much harder in a lemon market, trying to fine the non lemons sooner and more efficiently than the competition
Whoever said I would pay them the same low wage? I already gave one reason in another thread about why I don't think it's really a proper lemon market. This is another reason. The fact that I don't pay all up front and can evaluate the person for a marginal cost is another.
Not true in that he doesn't show it, or that this doesn't happen in reality?
I see the latter happening with specialists - firms will overpay to get a much needed specialist. I have seen instances where "key resources" get bid up internally until they make more than they could elsewhere. I only have 4 data points though - not enough to make a broad generalization.
> I show that fi rms bid excessively for the pool of incumbent workers at the expense of trying out new talent. (...) This problem is most severe where information about talent is initially very imprecise
This is nothing else than the Lemon effect at work.
(As it happens I wrote a post about it today: http://blog.medusis.com/are-you-a-lemon )
The Lemon effect (first discussed in a paper from 1970) appears in markets where buyers know much less about goods being sold than sellers.
When the probability of buying a bad product is high, buyers only offer to pay the lowest price. Sellers of bad products will sell at that price, but not sellers of good products. Therefore, after a short while, all good products are pushed out of the market and all that's left are duds (lemons).
That explains why employers are willing to pay more for incumbent workers: uncertainty about an incumbent workforce is much less than for "new talent", because the former is vetted by their current employers and new talent is, well... new.