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Wage Dispersion and Labor Turnover with Adverse Selection

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  • Carlos Carrillo-Tudela
  • Leo Kaas

Abstract

We consider a model of on-the-job search where firms offer long-term wage contracts to workers of different ability. Firms do not observe worker ability upon hiring but learn it gradually over time. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts designed to retain high-ability workers only. Low-ability workers have higher turnover rates, they are more often employed in low-wage firms and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3562.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3562

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Keywords: adverse selection; on-the-job search; wage dispersion; sorting;

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  1. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(4), pages 1436-1452, July.
  2. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 78(6), pages 1823-1862, November.
  3. Rasmus Lentz & Jesper Bagger, 2009. "An Empirical Model of Wage Dispersion with Sorting," 2009 Meeting Papers, Society for Economic Dynamics 964, Society for Economic Dynamics.
  4. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, Econometric Society, vol. 67(2), pages 251-334, March.
  5. Lentz, Rasmus & Mortensen, Dale T., 2005. "An Empirical Model of Growth Through Product Innovation," IZA Discussion Papers 1685, Institute for the Study of Labor (IZA).
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  7. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3548, C.E.P.R. Discussion Papers.
  8. Melvyn Coles & Carlos Carrillo-Tudela & Ken Burdett, 2008. "Human Capital Accumulation and Labor Market Equilibrium," 2008 Meeting Papers 1088, Society for Economic Dynamics.
  9. Gueorgui Kambourov & Iourii Manovskii, 2009. "Occupational Specificity Of Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 63-115, 02.
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  17. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 619-27, November.
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  19. Greenwald, Bruce C, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(3), pages 325-47, July.
  20. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 535-551.
  21. Carlos Carrillo-Tudela, 2009. "An Equilibrium Search Model When Firms Observe Workers' Employment Status," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 485-506, 05.
  22. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, Econometric Society, vol. 71(5), pages 1377-1404, 09.
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  24. Joanne Salop & Steve Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 80, Board of Governors of the Federal Reserve System (U.S.).
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