"Something interesting happens at this point in the process. An average of 50% of the candidates never continue past this step. The reason is not exactly known but I suspect it is because they simply do not know how to perform the task that is given to them"
If you're picking 10 candidates and only (initially) asking them for 1 hour's work, they're probably dropping off due to lack of interest in your project. They might not be taking you seriously.
I should clarify, I hire them for 1 hour and if they succeed in the task and I like their work I'll hire them for the project.
RE $5/hr - You'd be surprised what kind of applicants you get from around the world. I've had a very good iOS developer from India for $12/hr for awhile now. Great find. I also give my workers bonuses if they finish early, go above and beyond, etc. Key thing: Take care of people and most likely they'll take care of you.
If you're picking 10 candidates and only (initially) asking them for 1 hour's work, they're probably dropping off due to lack of interest in your project. They might not be taking you seriously.