The Effects of Skills Underutilization and Unemployment on Hiring Decisions

Research suggests negative effects of unemployment and skill underutilization on subsequent labor market outcomes. Among others, signaling theory has been used to explain why recruiters may evaluate competence and commitment of some job applicants less favorably than others. However, various country-, firm-, occupation-, and job-specific context factors may moderate such scarring effects. For example, a high youth unemployment rate may be associated with more scarring of previous unemployment spells and these effects might be different for occupations with different skill requirements. In this contribution, we explore the moderating role of transaction costs, i.e., the direct and indirect costs of recruiting and training new employees for scarring due to previous unemployment and skill underutilization. Furthermore, we investigate the extent to which the perceived difficulty of recruiting moderates these effects.

Using data from a recent large-scale factorial survey of recruiters in four European countries (N~=~2,000) and employing multilevel linear regression models, we found, overall, scarring due to skill underutilization to exceed scarring due to unemployment. Skill underutilization was especially penalized when recruiting for a particular position was considered easy. Indirect transaction costs, particularly anticipated time required for organizational socialization, were negatively associated with unemployment scarring, but positively with scarring due to skill underutilization. Unemployment spells only had a negative effect on hiring chances, for jobs where there were monetary expenses for introductory trainings.

Our findings constitute new evidence on the heterogeneity of scarring effects on hiring chances. We further contribute to the literature by highlighting the role of transaction costs and labor market performance.