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Information Cascades in the Labor Market

This article discusses information cascades in terms of the labor market.  When hiring employers are confronted with a new applicant, the employer needs to decide, based on accessible information, if this person would be a good person to have as part of their company.  The most accessible information, in this case, is the applicant’s history of employment.  If the applicant has had a streak of employment for the past few jobs he or she applied to, and received good recommendations from the previous employer, the new possible employer sees this as a good sign, and is more likely to hire the person.  On the other hand, if the applicant has a streak of bad or no job offers, the new possible employer assumes this means this person isn’t a good worker, and is much less likely to hire him or her These two scenarios represent two information cascades: an employed cascade and an unemployed cascade.

It also discusses two different “types” of workers: good and bad.  Good worker types realize that they should try really hard to get employed initially, because they realize that the success or failure of their first few jobs is likely to begin the cascade of their future employment career.  On the other hand, bad worker types are less likely to realize the importance of the first few job applications, and therefore don’t have as much initiative to get employed, therefore reinforcing an unemployment cascade.

When the new employer looks at the application, they don’t know the type of the worker, but just a signal from the previous employers about the worker: high or low.  This is the only information the new employer has about the applicant, and bases his or her decision on whether or not to hire them on this outside information.

This is largely a direct-benefit information cascade.  The new employer uses outside information (previous employers) to make a decision about a new hire, and this decision will either benefit them (if the new hire ends up being a good worker) or negatively affect their company (if the new hire is a bad worker).  They use past experiences with the possible new hire in order to make this decision, thus continuing the cascade, whether it be employment or unemployment.


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