Testing vs. Discretion: How Should Firms Hire Their Employees?

Firms invest a great deal of effort and resources when it comes to selecting employees—a company’s performance and productivity depend on accurate and efficient decision-making in the hiring process. Besides relying on interviews and resumes, firms often use information from third parties to assess candidates applying to jobs. How reliable is this decision-making process? In a new working paper from the National Bureau of Economic Research, Mitchell Hoffman, Lisa B. Kahn, and Danielle Li evaluate the ability of an objective hiring assessment to improve managers’ hiring decisions. This analysis helps determine how companies should assign values to metrics, such as applicants’ test scores and managers’ impressions of candidates. The findings indicate that employees hired primarily based on test scores are more likely to stay at a company longer, as opposed to those hired based on managerial discretion.

The authors use a unique dataset of 15 firms in the low-skilled, service sector from an anonymous data firm that conducts online job tests for candidates applying to these jobs. The assessment includes questions on technical skills, cognitive skills, and personality, along with questions related to the characteristics of the job. Using an algorithm, the applicants’ test scores are classified as green (high scores), yellow (moderate scores), or red (low scores). The test scores are then given to the firms’ managers, who can hire the applicants who scored green or instead use their discretion and consider other qualities aside from the test results. In this manner, managers can hire those applicants with red test scores if they think that those applicants are a good fit for the position, based on prior experience or personality.

The authors focus on job retention as the main measure of hiring quality. The data show that, on average, the employees with test scores classified as green stayed 11 percent longer than employees with moderate scores. When controlling for location-specific time trends (such as demand for employees), composition of applicant pool, salary levels, and other constant effects at the firm level, the authors find that workers hired using the job assessment stayed an average of 15 percent longer than those who were hired without testing.

In addition, the authors find that, for the cases where managers’ discretion takes precedence over test recommendations, the employee typically stayed at the company for a shorter length of time. This result suggests that, when managers exercise discretion and ignore the test scores, their biases may get in the way of choosing the best candidate.

The authors of the study looked specifically at low-skilled jobs in the service sector. However, assessments such as these are used in a variety of industries and job settings. This work demonstrates that similar job assessments can help determine how much influence managers’ discretion has on hiring decisions and employee performance. Firms may decide to implement assessment processes to limit mangers’ discretion or incentivize managers to utilize test scores in the hiring process. In using assessments, companies must also ensure they are not introducing new biases into the hiring process in cases where traditional test-taking scenarios may disadvantage non-native speakers.

Using assessments to help identify and hire the best employees has great potential. But, while algorithms and data can be powerful tools to match the best applicants to the right jobs and improve company performance, further research is needed to better understand and refine these tools.

Article Source: Hoffman, Mitchell, Lisa B. Kahn, and Danielle Li. “Discretion in Hiring.” National Bureau of Economic Research, 2015.

Featured Photo: cc/(Iain Browne)