Avoiding Labor Shortages by Employer Signaling - On the Importance of Good Work Climate and Labor Relations

Abstract

Avoiding labor shortages for skilled employees is one of the major challenges for highly competitive firms acting in tight labor markets. The ability to avoid labor shortages on the company level, for example measured by the share of vacant jobs, is distributed very unevenly and cannot in general be explained by differences in wages and compensation packages as standard economic theory would suggest. In our paper we present a theoretical explanation for large and persisting inter-firm differences in job vacancy rates. Many psychological studies show that unobservable job and company characteristics such as work atmosphere or individual self determination are crucial for employees' job choices. However, since these characteristics are not reliably observable to an outsider, we argue that potential employees use other, on the surface nonessential company characteristics as signals for their preferred characteristics in their job decision. To derive empirically testable hypotheses we reverse Spence's labor market signaling model and study how employers can reliably signal the quality of their work climate and labor relations to potential employees. We use a rich data set from approximately 700 firms to test our hypotheses and do find in fact that formal features of labor relations which on the surface may not seem relevant for recruitment success of skilled workers nevertheless exert significant effects on recruitment success and job vacancies.