Com­pan­ies claim they need work­ers but opt out of hir­ing the un­em­ployed

Danish companies often talk about labour shortages, but when they recruit new employees, they do not only look at competences, experience and salary expectations;

they also look at whether the candidate already has a job.

That is the conclusion of new research from Copenhagen Business School, the University of Copenhagen and Banque de France, where researchers examined what makes companies hold back on hiring – even when they need more employees.

One of the study’s most striking findings is that many companies prefer candidates who are already employed over candidates who are unemployed.

This may not come as a surprise to anyone who has ever had to explain a gap in their CV, however, what is new is that the researchers can show how widespread this preference is among companies and connect it to companies’ own recruitment challenges.

Around one in four companies say they prefer candidates who are already employed because unemployed people lose competences while out of work, 

and almost just as many say they prefer employed candidates because they believe unemployed candidates generally have lower qualifications.

This affects who is even considered when companies recruit.

“From a company perspective, being employed can send a positive signal and is seen as a sign that the candidate has competences that other employers value and that the person is familiar with the demands and routines that come with a job. But companies also risk overlooking people who could become highly valuable employees,” says Birthe Larsen, Associate Professor at the Department of Economics at Copenhagen Business School and one of the researchers behind the study.

The study is published in the European Economic Review and is based on survey responses from more than 2,000 Danish companies linked with Danish register data.

A self-reinforcing mechanism

Company preferences are not necessarily unfounded. The researchers find that unemployed people, on average, score lower on a measure of worker ability based on wage data,

but that does not mean unemployment is a good indicator of whether a specific person would be a good employee.

“It is not entirely irrational for companies to look for candidates who are already employed. On average, there is a slightly higher likelihood that they have the qualifications companies are looking for, but there is significant overlap between the groups, and many unemployed people are just as qualified,” says Birthe Larsen.

This means companies’ recruitment patterns can create problems if unemployment itself becomes a negative mark on a CV.

“You can see it as a form of statistical discrimination. Companies use employment status as a signal, but the problem is that it only says something about averages, and many people do not fit that picture,” she says.

The consequence may be that unemployed people find it harder to return to the labour market – not only because they may lack competences, but because unemployment itself is interpreted as a negative signal.

“If companies place too much emphasis on whether people are already employed, they risk marginalising individuals who actually have a great deal to offer and creating a negative spiral for them,” says Birthe Larsen.

It is not only about pay

The researchers also examined which barriers companies themselves point to when they hesitate to hire.

The responses show that recruitment challenges are far from being only about pay.

More than 70% of companies point to a lack of qualified candidates as a barrier to hiring, around 40% say candidates demand higher salaries than the company can offer, and more than one third highlight the time required to find, select or train the right employee.

“What is interesting is that hiring challenges are not only about salary. Many companies naturally point to salary expectations, but even more say it is difficult to find candidates with the right qualifications. That suggests the problem cannot simply be solved by increasing salaries,” says Birthe Larsen and emphasises that companies are not only thinking about what a new employee costs in salary, they also consider how long it takes to find the right person and how long it takes before the new employee can contribute fully.

“For companies, recruitment does not end the day the contract is signed. If it takes six months or a year before a new employee is fully up to speed, that is a real cost that can make companies hesitate,” she says.

Young companies are hit harder

Recruitment challenges do not affect all companies equally.

Younger and smaller companies in particular experience that search, matching and training make hiring more difficult, while companies that pay relatively high salaries are less likely to see pay as a barrier – but they still struggle to find qualified candidates.

According to the researchers, this suggests that some hiring challenges cannot be solved by salary alone.

“Young companies often find recruitment more difficult. They do not have the same visibility, reputation and sense of stability as larger and more established companies,” says Birthe Larsen.

From the employee’s perspective, taking a job in a young company may also feel more uncertain.

“You may not know whether the company will still exist in three years, and that uncertainty can make it harder for young companies to attract the candidates they need,” she says.

This matters because young companies often play a key role in job creation and growth.

“Young companies struggling more with finding and training employees can also become a barrier to their growth,” says Birthe Larsen.

Companies can broaden their search

Birthe Larsen does not point to one simple solution, but the results suggest companies may benefit from looking more broadly at candidates and relying less on the signals they normally use to quickly screen applicants.

“One possible solution is for companies to broaden their search and be more open to candidates who may not look like the perfect match from the outset. That may require more training, but it could also open the door to talent that companies would otherwise overlook,” she says.

That is especially relevant at a time when many companies find recruitment difficult.

When hiring new employees is expensive and time-consuming, companies may also have an interest in developing the employees they already have.

“When recruitment is difficult, it becomes even more important to focus on the employees you already have. For some companies, upskilling may be a better solution than constantly trying to find the full-fledged candidate externally,” says Birthe Larsen.

The researchers therefore point to a paradox in the Danish labour market: Companies lack workers, but their own perceptions of who is most attractive to hire may contribute to making matching more difficult.

“If companies want to reduce their hiring challenges, they may need to consider whether they are searching too narrowly because it is not only about finding the perfect candidate, but also about recognising the potential in people who may not initially look like the safest choice,” says Birthe Larsen.