Hiring policies in an uncertain environment: Cost and productivity trade-offs

Firms naturally want to hire workers who are fast-learners and committed for long periods. Finding such people or carefully screening applicants is costly whether done directly by the firm or with the help of a recruitment agency. We explore the trade-offs involved in determining the effort/investment that should be expended on ‘quality control’ in hiring. We envision a firm that has to decide which proportion of its hiring to do using a ‘careful’ but expensive agency. Agencies may provide discounts to firms who do most of their hiring through them. Workers differ in their learning curve and in their (random) length of stay in the job/firm. We provide sufficient conditions for using only one agency. We also explore the relations between turnover and productivity, which at times turn out to be quite counter-intuitive. For example, reduced turnover may adversely affect productivity even in the presence of learning with experience.