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Hiring Risky Workers

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  • Edward P. Lazear

Abstract

It has long been recognized in finance and other literature that variance provides option value. The same point carries over to the labor market. Firms like variance in new employees because they can keep the good workers and terminate the bad ones. But market wages must adjust to make the marginal firm indifferent between high and low variance workers. The market equilibrium for new, risky workers is explored to determine how workers and firms line up on the various sides of the market. Firms in growing industries prefer young, high variance workers. Growing industries will be characterized by high turnover rates. In order for risky workers to provide option value, it is necessary that the initial employer have some advantage over other firms. Private information or mobility costs can provide that advantage. Also required is that the risk have a firm specific component. General variations in ability provide no option value to an initial hirer.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5334.

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Date of creation: Nov 1995
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Publication status: published as Ohashi, Isao and Toshiaki Tachibanaki. Internal labour markets, incentives and employment. New York: St. Martin's Press; London: Macmillan Press, 1998.
Handle: RePEc:nbr:nberwo:5334

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  1. Gibbons, Robert & Katz, Lawrence F., 1991. "Layoffs and Lemons," Scholarly Articles 3442782, Harvard University Department of Economics.
  2. Michael Waldman, 1983. "Job Assignments, Signalling nad Efficiency," UCLA Economics Working Papers 286, UCLA Department of Economics.
  3. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  4. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  5. Gronau, Reuben, 1988. "Sex-Related Wage Differentials and Women's Interrupted Labor Careers--The Chicken or the Egg," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 6(3), pages 277-301, July.
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Cited by:
  1. Gerard A. Pfann, 2001. "Downsizing," Working Papers 0110, Harris School of Public Policy Studies, University of Chicago.
  2. Piekkola, Hannu, 2002. "Transferability of Human Capital and Job Switches," Discussion Papers, The Research Institute of the Finnish Economy 794, The Research Institute of the Finnish Economy.
  3. Piekkola, Hannu, 2000. "Unobserved Human Capital and Firm-Size Premium," Discussion Papers, The Research Institute of the Finnish Economy 739, The Research Institute of the Finnish Economy.
  4. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers, The Research Institute of the Finnish Economy 695, The Research Institute of the Finnish Economy.
  5. W.H.J. Hassink & G. Russo, 2003. "Wage Differences between Incumbents and External Candidates," Working Papers, Utrecht School of Economics 03-03, Utrecht School of Economics.
  6. John D. Burger & Stephen J.K. Walters, 2008. "The Existence and Persistence of a Winner's Curse: New Evidence from the (Baseball) Field," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 232-245, July.
  7. Peter Groothuis & Richard Hill & Timothy Perri, 2004. "Early Entry in the NBA Draft: The Influence of Unraveling, Human Capital and Option Value," Working Papers 04-05, Department of Economics, Appalachian State University, revised 2005.
  8. Huovinen, Pasi & Piekkola, Hannu, 2001. "Unemployment and Early Retirements of the Aged Workers in Finland," Discussion Papers, The Research Institute of the Finnish Economy 750, The Research Institute of the Finnish Economy.
  9. Canziani, Patrizia & Petrongolo, Barbara, 2001. "Firing costs and stigma: A theoretical analysis and evidence from microdata," European Economic Review, Elsevier, vol. 45(10), pages 1877-1906, December.

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