A model for employer’s decision for recruitment

Abstract

This paper presents a theoretical and empirical analysis of this decision and how it relates to wage setting and the provision of general training. The theoretical framework is a promotion tournament involving M competing firms with heterogeneous productivities, two-level job hierarchies, and a fixed number of managerial positions. This paper also considers an alternative model based on variation in the quality of the worker-employer match. Both models predict the following results: As the number of workers at the lower level of the hierarchy increases, holding fixed the number of managers at the top, 1) internal promotion increases relative to external recruitment, 2) employers provide more general training, 3) the percentage of employees in the upper tail of the wage distribution decreases, 4) profitability increases. This paper tests these predictions using data from the 2017 wave of the WERS, a nationally-representative cross section of Indian establishments. The empirical results are supportive and contribute to the literature some new stylized facts concerning how key employer decisions vary with both the size and shape of the organizational hierarchy.