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Abu Dhabi, UAETuesday 20 November 2018

Economics 101: Why do employers ask you for your salary expectations?

It is all about the key issue of using or not using first-mover advantage

Teasing advantageous information out of potential employers or employees is a useful strategy. AP
Teasing advantageous information out of potential employers or employees is a useful strategy. AP

When you interview for a job, one of the questions you likely dread is: “What salary are you looking for?”

You probably feel that the employer is taking advantage of you, but what are the economic principles underlying this practice?

To understand why, we can begin by noting this actually represents a violation of a general principle in economics known as “first-mover advantage”. In adversarial settings where the participants take turns to choose an action, in general, it is preferable to be the first person to act. A familiar example is the game of chess, where playing as white - and hence moving first - is advantageous.

The reason for the prevalence of first-mover advantage is that by moving first, you can usually ensure that the interaction goes in a direction that favours your interests, by eliminating certain options that are available to your adversary. Children see this in games of “X-O”, whereas adults experience it when a group of coworkers are negotiating over days off. First-mover advantage also reflects the fact that taking the initiative can force your opponent into a defensive posture, whereby they are always responding to your choices rather than exerting their own influence; sports such as tennis illustrate this clearly.

First-mover advantage is not a universal phenomenon, however, as in certain settings it is advantageous to let others act first. One of the key factors that leads to a breakdown in first-mover advantage is uncertainty among the adversaries about one another’s abilities or available moves; under these circumstances, the first-mover’s choices tacitly convey strategically valuable information to their opponents. Card games such as poker fall into this category: observing how other players play before you helps you deduce the cards that they are concealing and often this benefit outweighs the traditional benefits of moving first.

In the employer-employee negotiations, is it better to move first or second? One feature of human psychology that makes moving first more favourable in negotiations is anchoring bias: humans irrationally fixate on the first figure that is proposed, using it as a benchmark. This happens because the human brain has limits to its power and is designed to use shortcuts to economise on effort; fixating on recently related information, such as the first proposal in a negotiation, is one such shortcut and skilful negotiators who are aware of this flaw in the human brain can deploy that knowledge to their advantage, by making the first proposal.

Shrinking-pie negotiations - ones where the prize that the employer and employee are bargaining over shrinks the longer they take to reach an agreement - also tend to result in first-mover advantage, as the second-mover may favour accepting the first-mover’s offer rather than incurring the cost of delaying while they formulate their own counteroffer.

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Trade union members who go on strike illustrate this principle: during negotiations, as long as the strike is going on, both the employer and employee are losing money. Since making a proposal takes time, it costs money, too, and so whoever gets to make the first proposal may be able to get a better deal by exploiting the other side’s desire to avoid further delay.

Asking an interviewee for their salary expectations reflects a belief in the presence of a second-mover advantage; what underlies the violation of the general principle of first-mover advantage? Like card games, the key is the hidden, strategically valuable information that each side is trying to tease out of the other.

Employers have a maximum wage that they are willing to offer and they hope that the employee will accept something much lower. In contrast, employees have a minimum wage that they are willing to accept and they hope that the employer will accept something much higher. Each side wants to keep its own cut-off wage secret and wants to know the other side’s cut-off wage.

When either side makes a wage offer, it is forced to reveal something about its own cut-off. For example, we know that an employer will never offer more that its maximum, so whatever it offers, the employee can use as a minimum from which to ask for more. Knowing this, why doesn’t the employer simply make a really low offer? Because there is a risk of the employee breaking negotiations off if they are insulted.

If the employee had to move first, then they would be concerned about stating a figure that is too high because they are unaware of the employer’s cutoff and so they will tend to lower their demands. This is why employers prefer that you move first - it is a way of ensuring a lower wage.

Is there anything that you can do about this? Usually, employers can force you to move first, because labour markets tend to be skewed in their favour, especially when there is significant unemployment. That means your best option is gathering whatever information you can about the employer’s cutoff, such as by talking to current and former employees. This helps eliminate the second-mover advantage, so that you can get the best deal possible.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.