I need to hire a web designer. How do I test his creativity and skills before I hire him. Ideally I'd like to give him a fairly open-ended task i.e. I give him a problem statement and ask him to design a PSD file.
Any suggestions on the problem statement I might give him? Also, is there a better way to hire /test a web designer?
I think the best way to hire/test a web designer is looking at his/her portfolio online (preferably all live websites and works).
Making someone design a PSD file as a test is too much for a freelance position. The inexperienced one might agree to do it but the best designers out there would prefer you to hire them first (sign the contract).
For a well paying job then you can give a test of re-aligning a website instead of re-designing it from scratch.
You've identified two separate areas you want to test already. I'd suggest two tasks, one aimed at each. One should be technical to test the skills, eg provide a Firefox+Firebug environment showing a webpage with some subtly broken CSS, ask zir to identify the problems and fix as many as they can.
The other should be more open-ended as you say, maybe just brainstorming on a design. Talk through a situation or problem and ask zir to make some sketches for you. This is also an opportunity to see if you can work together easily, but be careful they are contributing not just mirroring. A good topic might be page controls.
IMHO a good web designer also needs to keep up with the industry. Ask what they're technically excited about right now. If their eyes light up and they become very animated, they are probably a good bet.