Monitoring for Worker Quality∗

Much nonmanagerial work is routine, with all workers having similar output most of the time. However, failure to address occasional challenges can be very costly, and consequently easily detected, while challenges handled well pass unnoticed. We analyze job-assignment and worker-monitoring for such ‘guardian’ jobs. If monitoring costs are positive but small, monitoring is nonmonotonic in the firm’s belief about the probability that a worker is good. The model explains several empirical regularities regarding nonmanagerial internal labor markets: low use of performance pay, seniority pay, rare demotions, wage ceilings within grade and wage jumps at promotion. ∗The research in this paper was supported in part by NSF grant SES-1260917. We are grateful to Costas Cavounidis, Bob Gibbons, Sambuddha Ghosh, Eddie Lazear, Bart Lipman, Andy Newman, Mike Waldman and participants at seminars, workshops and conferences at Boston University, MIT, the NBER, SOLE, Tel Aviv University, UC Santa Barbara and the University of New South Wales for helpful comments and suggestions. The usual caveat applies. We present a formal model of monitoring for worker quality in “guardian” jobs (Baron and Kreps 1999). Many nonmanagerial jobs have the principal characteristics of such jobs. We analyze efficient monitoring in guardian jobs and show that it results in wage and promotion profiles consistent with a number of regularities observed in non-managerial labor markets. Notably, we predict that pay will be largely based on factors—such as age, experience and seniority—that may be related to productivity, but are not themselves measures of productivity (Doeringer and Piore 1971). We make three significant departures from the current literature. First, we assume the primary purpose of monitoring is to evaluate worker quality at this job and not to prevent workers from shirking on the job. To focus attention on the evaluative role of monitoring, we abstract entirely from moral hazard. Second, we treat guardian jobs as common in nonmanagerial employment: much of the work is routine, and there is typically little variation (in our formal model, none) in worker productivity; there are occasional ‘challenges’ which good workers tend to face successfully, while bad workers tend to fail at significant cost to the firm. Such challenges are firms’ sole opportunity to distinguish worker quality. Third, we formalize the view that failures are much more noticeable than successes and are observed even if the firm does not actively monitor the worker. However, when a worker successfully handles a challenge, output is not disrupted, making the firm less likely to observe a success unless it actively monitors the worker. Jacobs (1981) describes the classic guardian job: “Even if the professional pilot never makes any mistakes in a long career, his company’s profits will not go up, but one error may be quite costly to his airline.” The famous con-artist, Frank Abagnale, claims to have worked for eleven months as chief resident pediatrician in a Georgia hospital until he was faced with an oxygen-deprived baby and was almost exposed (Abagnale 1980). Despite having no medical training or tertiary education, he handled routine tasks until he encountered an unusual challenge. But there are many other examples. The racist employee who responds inappropriately to an African-American customer may cost the firm far more This technology is, in many ways, similar to the Biais et al (2012) model of moral hazard in which very costly challenges arrive infrequently. There effort rather than ability reduces the probability of failing a challenge.