The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium.
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Paper provided by Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem in its series Discussion Paper Series with number
dp488.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David Austen-Smith & Jeffrey S. Banks, 1998.
"Cheap Talk and Burned Money,"
Discussion Papers
1245, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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