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Layoffs, Lemons and Temps

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  • Christopher L. House
  • Jing Zhang

Abstract

We develop a dynamic equilibrium model of labor demand with adverse selection. Firms learn the quality of newly hired workers after a period of employment. Adverse selection makes it costly to hire new workers and to release productive workers. As a result, firms hoard labor and under-react to labor demand shocks. The adverse selection problem also creates a market for temporary workers. In equilibrium, firms hire a buffer stock of permanent workers and respond to changing business conditions by varying their temp workers. A hiring subsidy or tax can improve welfare by discouraging firms from hoarding too many productive workers.

Suggested Citation

  • Christopher L. House & Jing Zhang, 2012. "Layoffs, Lemons and Temps," NBER Working Papers 17962, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17962
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    Cited by:

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    3. Gebauer, Markus, 2019. "Permanent and temporary workers in a matching framework," Research in Economics, Elsevier, vol. 73(2), pages 138-148.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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