Caplan's challenge in the book is to explain why educational credentials, high school diplomas and college degrees, have such a strong impact on earnings. People don't appear to learn very much from high school or college, and certainly they forget much of what they learned. When tested, they fail to recall most of the material they learned and fail to apply knowledge to new problems. (If you doubt this, seriously, go read the book! There is a thorough literature review backing this surprising claim.) And yet employers will pay a premium for a degree, over and above what they'd pay for an otherwise identical candidate without the degree. Caplan's story is that a degree signals pre-existing ability. Four years of intensive study demonstrate a combination of intelligence, conscientiousness, and agreeableness that can't otherwise be faked.
Okay, but why can't employers just use a "hire, observe, and dump" strategy? Hire someone who shows some promise of becoming a productive employee, and just fire them if they don't work out. After a few months of working for you, the employee will have demonstrated their ability (or lack thereof). The "everyone gets a degree" signalling equilibrium should break down if employers start using this strategy. But it doesn't happen. So this is another mystery that Caplan needs to explain. He does so beautifully.
He describes the literature on "employer learning", which tries to answer the question "How long does it take for employers to get a good idea of their employees' abilities?"
When researchers explicitly gauge the speed of employer learning, the process seems to take years or decades, not months—especially for the sizable majority that doesn’t finish college.
Labor regulations and lawsuits aside, firms are not run by robots. When humans work side by side, they develop fraternal feelings for one another. As long as their business is not in jeopardy, many employers retain moderately subpar employees indefinitely. And even if the boss is bereft of empathy, most of their employees won’t be. Disgruntled workers are less productive workers.In the real world, it can be very hard to fire someone even if the firm has a good reason.
...Give people a chance, observe how they do, fire them if they don’t measure up: a “Hire, Look, Flush” personnel policy sounds both profitable and fair. Yet group identity and pity get in the way. After a firm hires you, you’re part of the team. If you don’t measure up, firing you isn’t like returning a blender to Walmart. Your teammates either have to live with your poor performance, or feel sorry to see you go.
...The more firms fear to fire, the more educational signaling matters. Once employers get hirer’s remorse, they’re stuck in an awkward position. Relying on credentials is a good way to avoid getting stuck in the first place.
Here is the process as it was described to me by an HR person. If the employee isn't performing, they generally get placed on a "productivity improvement plan." The manager discusses the employee's poor performance with them and lays out some objective goals to meet. If the employee meets those goals, the slate is swept clean. The employee is thought to have "graduated", the problem resolved. This process is emotionally exhausting for the manager and humiliating for the employee, and I suspect the real purpose of these plans is to make the under-performer feel so uncomfortable that they seek employment elsewhere. It is HR's way of avoiding a wrongful termination lawsuit, which can happen even though the employer is an at will employer and can fire with or without cause. (It's also probably HR's check against unreasonable/incompetent/arbitrary managers, which is a real problem legitimately needing a solution. But I've seen cases where this process gets in the way when there is an unambiguous case for termination.)
The recent example (the one involving people I know) involved someone who does statistical work. He's not an assembly line worker building widgets. His manager can't simply write an improvement plan that says, "Build 20 widgets a day, or your job will be terminated." Measuring performance for some kinds of jobs is subjective. It would be hard to develop a clear metric of success. And even if someone did write down clear goals for an improvement plan, that's the kind of thing that a desperate employee can game. (Caplan says, "With a job at stake, even a slacker will work like a dog." As in, I can temporarily be more productive and conscientious if I really try, but I will revert to my resting state when the pressure is off.)
The HR person's description of a "performance improvement plan" deeply bothered me, particularly the part about the slate being swept clean if the problem employee meets the plan. Suppose a bad employee gets placed on such a plan. The employee is no good, and manager and employee both know it. But they work their butt off to avoid getting canned. The manager sees the effort, feel sorry for the worker, and reconsiders whether their performance is really so bad they need to be fired. The manager rolls her eyes and checks the "Meets Goals" box. So they "meet the plan." But the relationship between the manager and employee will never quite be the same. They both share a mutual understanding that the manager does not respect the worker. The worker transfers to another manager when another position opens up within the same company. Suppose they're still no good in their new position. They go on an "improvement plan" under their new manager, and the pattern repeats itself. What should be seen as a history of poor performance and a wake of disappointed managers is instead seen as a perpetually "clean slate." The historical record gets erased every time the under-performer "meets plan."
This can be made worse when a weak-willed manager decides to avoid having these tough conversations with their problem employees. It is emotionally exhausting to have those conversations, and some people don't have the stomach for it. In many companies, a manager has to do an annual performance review. This is an official document of the employee's performance for the year, usually filed with Human Resources. Come the end of the year, when a review is due, the manager might realize they haven't communicated any of their concerns with the problem employee. It would be "unfair" to give the person a bad review without any prior warning. A warning might have given the employee a fair chance to do something about the problem. So the manager might just say "Screw it!" and give the employee an average/adequate evaluation. If this continues year after year, perhaps under a series of different managers, HR will not have any official record of which employees are under-performers.
Given all this, Caplan's discussion of "employer learning" makes sense. It does not surprise me at all that an employee can under-perform for years or decades without getting fired. Productivity problems can be hard to measure, difficult to document (especially if an employer has a policy of purging the relevant history!), and emotionally difficult to confront.
A manager recently described to me an issue with a problem employee. I wouldn't have been able to understand the problem without my specific technical background. Trying to explain this problem to an HR person could be extremely difficult. You end up having to say, "Take my word for it: this person is not qualified for his job." A potential solution to this problem was to make the under-performer acquire a certificate or credential from some third party. (Most of the people I work with have various credentials from various accrediting organizations. Career tip: get one!) That would be an unambiguous test. If the employee can't pass the test required for the credential, we have a neutral third-party confirming our suspicion that they're no good. In this light, credential inflation makes a lot of sense! "It's hard to describe...he's just not qualified" can be a tough sell. "He doesn't have the industry-approved certificate to do this work" is a pretty unambiguous test.