References, Applications and Monopsonies: Big businesses gain little but have no incentive to stop

Firstly, an important thing I want to make clear. I am more than happy to write references for my students and take great pleasure seeing them get the job or master’s programme they want. I really do not mind giving up my time to write references and I have never refused a student’s request to write them a reference. What I do not like, however, is for this to be used against me by institutions and firms, especially when they are gaining very little.

It is important I stress that I am being in no way critical of the students themselves who are just as much caught up in the system as I am. They face similar problems as I do when they apply for jobs and masters programmes, a subject which I will subsequently address in this blog.

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Doing references does not take up a great deal of my time, but I do I write a number of references every year for students applying to post grad applications and jobs. The amount of references can be as low as 10-20, but given that many students will apply to multiple places, this can quite easily be something like 50-100 submissions.

The amount of references I do got me thinking about why references are useful in the first place. For example, if you are trying to distinguish candidates for a particular job, having information on them from a person who knows them well can be useful in making this choice.

References probably started as a way of employers having someone to “vouch” for the candidate to make sure they are of good character. In small villages & networks this probably works quite well, as everybody knows everybody the referee can be somewhat accountable for their reference. This lack of accountability in the modern age is one reason why everyone has glowing references and means they are of little use.*

When I have been on selection panels myself, I do not think I have read a reference that has affected my decision either way. So to me they are not so much use but I can imagine them being more use in other contexts and industries. The problem is we do not know how useful they are because references are free to those that demand them: the employer.

I am not one of those economists who think everything should have a price on it (especially as it opens up a whole other debate I do not want to get into). However, in the same way people started thinking about how many plastic bags they would take at the supermarket when a small fee was applied, having a price on references would make employers at least think about how they go about the process.

Even if you think that references are important, how they are submitted is vastly inefficient. At best I am able to simply send my reference via e-mail. Often, however, I have to type responses to questions in various boxes. Here lies the key problem with this process: even if these subtle differences add very little in terms of the benefit to the employer, it is still optimal for them to do it as it costs them nothing. They are not the ones having to fill it out. Here is the thing, I HAVE to fill it out – it is not like an optional survey.

This sort of bureaucracy** happens all the time in large businesses, I think mostly because they have established HR departments which have their own internal ways of doing things (I have little experience of small firms, maybe they are just as bad?). Filling out basically the same information in slightly different ways is extremely time-consuming and frustrating. My students often have to do these sort of applications when applying for jobs and masters during their final year of studies which is hardly idea for them.

This makes me think if anything, these firms have too much labour market power. In economics we call this a monopsony. A monopsony like a monopoly, but rather than a firm having market power over consumers, they have market power over suppliers  (in this case, labour).

You cannot imagine all these internal idiosyncrasies being implemented on consumers in competitive markets who would be put off by this sort of form filling. One of the reasons why PayPal is so popular is because you don’t have to fill out your details all the time. I even think some of these firms practises would be clamped down upon by the labour equivalent of a consumer watchdog. Unions could help here - but the focus for unions is primarily for those already in the job rather than those applying for the job.

As I have said, I really wouldn’t mind so much doing all this if I felt they were actually meaningfully giving good information to help selectors make decisions. But as it currently stands, I feel like no one is really winning from this system. 

How to improve the reference process:

• Pooled submissions (UCAS for student applications the UK and econjobmarket.com for jobs are examples).
• Standardised forms: these should be jointly designed by institutions, unions and applicants within industries. If any extra information is needed then this should be minimal with an explanation of why it is needed.
• Only ask for references when decisions are at the margin, i.e. deciding between close candidates.
• You do not need a reference letter if you are just asking for proof the person went to that institution.
• End practise of offer subject to references (how often has an offer being rescinded as a result of this???)

*Even if we did obtain “honest” references from referees it would still actually be quite hard for them to be useful.  For references to work we would need to assume that each referee’s distribution of who they taught/supervised be roughly the same, as naturally referees will compare with everyone they have taught and supervised (this is also related to why I think Tripadviser is rubbish).

**Bureaucracy is a negative word which highlights excessive administration. However, there is no word for good administration which I think is a shame as good administration should not just be absence of bureaucracy.

How ideas spread: Why Econ101ism is economist's Frankenstein and we are to blame.

“Alas, poor Yorick! I knew him well”

 William Shakespeare, Hamlet

Do you see a problem with the above quote? If you do, it is because you either know Hamlet very well or you know it is a famous misquote. The real line is “Alas, poor Yorick! I knew him Horatio?". In fact, there are lots of famous misquotes that continue over time. Some of which you will have no idea that they were a misquote. I always found Neil Armstong’s “One small step for man, one giant leap for mankind” confusing: was it profound or just a tautology? In fact, he said “One small step for a man, one giant leap for mankind”, which obviously makes much more sense. The reason this misquote exists is due to the sound cutting out a little so you can barely hear the “a”. Listen to it again.

If a significant proportion of people know these misquotes exists, why do they continue? One would hope over time information about the correct quote would dominate the misquote, and the misquote would disappear from memory. As a result, I think the misquote is a good starting point to discuss how ideas and information spread.

The recent book by Robert Shiller’s Narrative Economics seems to agree with my view about how ideas spread, or at least I think that it does.  I haven’t picked up the book yet which has been sitting on my bedside table for a few weeks now. But after reading the blurb, I think I get the gist of what he is getting at, and I may never get round to reading it.

Some of you will now be thinking this is sacrilege. This guy is meant to be an academic, he could be spreading misinformation about Shiller’s view, how scandalous! Well the reason I did this was to demonstrate my point.*

My actions were how a lot of people will come to understand and spread ideas. Even if I read Shiller’s book cover to cover, I may not do a good job of explaining what Shiller is getting at. Perhaps Shiller did a bad job of what he was getting at. Perhaps I misread what Shiller’s view is, and perhaps you misread my misreading and so on.

Now I am not suggesting that we can never understand anything or not seek to try and understand.  But I think it is important to recognise that information, or more importantly our understanding of that information, is not passed on like carbon copies. Think “Chinese whispers” but on a much larger scale.

However, even if the idea is passed on correctly, certain ideas may spread faster and dominate other ideas. You may have heard the quote:

 “A lie gets halfway around the world before the truth has a chance to get its pants on.”

Winston Churchill (did not say this)

So how fast an idea spreads is important for our collective understanding of that idea. But perhaps we believe that eventually the “truth” will dominate other ideas so we shouldn’t worry too much about it. However, even if we were to accept this always happens eventually**, there is still going to be a period of time where people will believe the lie over the truth.

In economics there is a term called Econ101ism. This is attributed to the simple ideas that are taught in Econ101 but then are often misapplied to more complex scenarios. A key example of this is people thinking the market is always efficient. What is strange is that in Econ101 you often see cases where the market is inefficient, such as externalities (think, pollution etc).

However, I would argue this is not really the fault of students misremembering what they were taught, it is partly a problem with how Econ101 is taught: it does not consider the consequences that students are actually going to misremember and forget in the future. So Econ101ism is economics very own Frankenstein (actually economists are Dr Frankenstein and they created the monster that is Econ101ism).

For the most part, Econ101 does look at benchmark cases where the market is always efficient. Even if we deviate from this to show how it often isn’t, students are going to hear “market” and “efficient” an awful lot. So it is hardly surprising that overtime many students will come away remembering the thing that was repeated over and over.

My greatest concern is that even if we spread the notion of Econ101ism, it is really hard sometimes to convince individuals once an idea such as Econ101ism takes hold.

So Econ101ism is out there and even if we were to change how Econ101 is taught completely, it is still going to take an awful long time to cure. As Shakespeare said “the truth will come out”. But my worry is, what happens in the meantime?

*This is one of my favourite pedagogical techniques. Yes I do wear a leather jacket and sit on my chair backwards whilst teaching, why do you ask?

**It may not always happen eventually. And yes, we can have a debate whether we can know something to be “true” or not but I need a drink first.

***UPDATE***

My friend Helen, a Shakespeare expert, informed me that it is actually “the truth will come to light”. I wish I could say I did this on purpose but sadly I did not. The weird thing about is I did in fact look this up before I posted the blog, so I must have subconsciously made the typo!