July 22, 2011

Vouching for Outsourced Labor

Research shows how online remote employment agencies can provide a crucial "stamp of approval" for inexperienced workers.
Print this story

While offshoring jobs is not a new phenomenon among US companies, how firms find and connect with workers overseas continues to evolve. Though advances in communications technology have made it easier than ever to connect with contractors in other countries, it can be a challenge for US firms to identify the best candidates among large pools of similarly qualified applicants applying for contract work abroad.

To help address this challenge, online labor market platforms that facilitate remote hiring have grown quickly in the last several years. A firm that wants to hire a remote worker can create an account, post a project description, and view potential job applicants located around the world in areas like software development, website design, and data entry.

“You press a button and access tens of thousands of highly qualified computer programmers and skilled workers in many other areas,”

Professor Catherine Thomas explains. Companies can see where candidates went to school, their work history, and any specialized training they’ve undertaken. “But employers in the United States may not know how to interpret that information, especially because many workers have similar qualifications and professional experiences. For instance, many employers screen workers based on the university they attended. But it’s hard to tell if you’ve found the right person for the job if you know little about differences between universities in other countries.”

Thomas and Christopher Stanton of Stanford worked closely with one of the largest online labor platforms, oDesk.com, to learn about how workers find jobs through these sites. Workers who have been previously hired through the site have an employer feedback score displayed on their profile, which provides useful information for potential future employers about the quality of a worker. But workers new to the site don’t yet have any individual feedback.

The researchers discovered that of the 1.3 million workers available for work on oDesk.com, more than one-third of all workers who are employed are affiliated with one of many small independent outsourcing agencies within the oDesk market. This affiliation is indicated in their profile, along with an agency-level feedback score from the jobs done by all workers, including the worker in question, who are affiliated with the same agency. For new agency affiliates without prior experience, this number represents the average feedback scores from jobs completed by all other agency affiliates.

By sifting through individual worker profiles that include work history and hourly wage information, the researchers traced how agency affiliation came into play. Out of 120,000 new potential workers who signed up to find jobs through the service from August 2008 through December 2009, only 12,000 workers were affiliated with an outsourcing agency. But a new affiliated worker was much more likely to be hired than a new non-affiliated worker and, once hired, affiliated workers were likely to earn a higher wage than workers who didn’t have the backing of an outsourcing agency. No such differences between outsourcing agency affiliates and non-affiliates were found for more experienced workers who had previously contracted jobs through the site.

In other words, employers are not only more likely to hire new applicants with outsourcing agency affiliations, but they’re also more likely to pay them more than non-affiliated first-time applicants. Why do outsourcing agencies boost first-time candidates in the eyes of remote employers while not affecting how employers view experienced workers with prior feedback on the site? It’s not the job-related training or services that agencies provide that make affiliation valuable, Thomas says, since the oDesk platform itself directly provides a wide range of tools that allow employers to work very successfully with workers in different locations.

Instead, agencies help employers identify and hire good inexperienced workers by providing some additional information — affiliation is, in itself, a “stamp of approval.” Based on employers’ past experiences, agencies have developed reputations for offering affiliation only to high-quality contractors, she explains, and their approval correlates with quality work as assessed by the hiring firms. However, once an individual worker has completed jobs, their feedback score becomes public information on oDesk.com, which means that validation from an independent agency is no longer needed.

Surprisingly, the answer to how agencies identify high-quality workers new to the online market lies in a rather traditional, low-tech arena: old-fashioned, in-person networking. The agencies are small, with members that often share some physical connection — often, they attended the same college, live in the same town, and tend to be the same age.

“Basically, they know each other offline, in ’real’ life,” Thomas says. “These findings suggest that those ties that have long been thought important in traditional labor markets — school ties, for instance — continue to be important to workers looking for their first jobs in a virtual market.”

However, this type of offline association also means that agencies have well-defined boundaries and may be limited in how large they can grow. Still, although the presence of agencies within online labor markets suggests there are still some informational challenges to be solved in this new offshoring frontier, “the fact that institutions are growing to address these issues is a positive sign for the future of offshoring,” Thomas says. “Companies often hire workers for lower wages through offshoring, but they’re still willing to pay a little more, at least initially, to someone who is identified as a high-quality candidate by a reputable source.”

Catherine Thomas is assistant professor of finance and economics at Columbia Business School.