Employment Risk and Performance

Susan Godlonton, University of Michigan

This paper examines the impact of employment risk on performance. To induce exogenous variation in employment risk, I randomize outside options for job seekers undergoing a real recruitment process. Reducing employment risk by offering these outside options reduces the incentive to exert effort in the recruitment process while simultaneously reducing the stress experienced during recruitment. I find that performance is highest and effort is lowest among those assigned the lowest employment risk (a guaranteed alternative job), and performance is lowest and effort highest among those facing the highest employment risk (those without any job guarantee). The performance improvements have significant welfare implications. Job seekers assigned a high probability of an outside option were twice as likely to be hired in the standard job recruitment process compared to those assigned a low probability of receiving an outside option.