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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.

Suggested Citation

  • Edward P. Lazear, 1995. "Hiring Risky Workers," NBER Working Papers 5334, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5334
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    Cited by:

    1. Peter Kuhn & Kailing Shen, 2015. "Do employers prefer migrant workers? Evidence from a Chinese job board," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-31, December.
    2. W.H.J. Hassink & G. Russo, 2003. "Wage Differences between Incumbents and External Candidates," Working Papers 03-03, Utrecht School of Economics.
    3. Pauline Givord & Lionel Wilner, 2015. "When Does the Stepping‐Stone Work? Fixed‐Term Contracts Versus Temporary Agency Work in Changing Economic Conditions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(5), pages 787-805, August.
    4. Barbara Arel & Michael J. Tomas III, 2012. "The NBA Draft," Journal of Sports Economics, , vol. 13(3), pages 223-249, June.
    5. Piekkola, Hannu, 2000. "Unobserved Human Capital and Firm-Size Premium," Discussion Papers 739, The Research Institute of the Finnish Economy.
    6. Butschek, Sebastian & Sauermann, Jan, 2019. "The Effect of Employment Protection on Firms' Worker Selection," IZA Discussion Papers 12305, Institute of Labor Economics (IZA).
    7. Eriksson, Tor & Qin, Zhihua & Wang, Wenjing, 2014. "Firm-level innovation activity, employee turnover and HRM practices — Evidence from Chinese firms," China Economic Review, Elsevier, vol. 30(C), pages 583-597.
    8. Gerard A. Pfann, 2001. "Downsizing," Working Papers 0110, Harris School of Public Policy Studies, University of Chicago.
    9. Huovinen, Pasi & Piekkola, Hannu, 2001. "Unemployment and Early Retirements of the Aged Workers in Finland," Discussion Papers 750, The Research Institute of the Finnish Economy.
    10. Simon Burgess & Julia Lane & David Stevens, 1998. "Hiring Risky Workers: Some Evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 669-676, December.
    11. Kuhn, Peter J. & Shen, Kailing, 2014. "Do Employers Prefer Undocumented Workers? Evidence from China's Hukou System," IZA Discussion Papers 8289, Institute of Labor Economics (IZA).
    12. 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, John Wiley & Sons, vol. 75(1), pages 232-245, July.
    13. Pauline GIVORD & Lionel WILNER, 2009. "Fixed-Term Contracts, Incentives and Effort," Working Papers 2009-15, Center for Research in Economics and Statistics.
    14. 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.
    15. 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.
    16. Claudia Pigini & Stefano Staffolani, 2022. "Firing Costs and Job Loss: The Case of the Italian Jobs Act," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(1), pages 105-143, March.
    17. Peter A. Groothuis & James Richard Hill & Timothy J. Perri, 2007. "Early Entry in the NBA Draft," Journal of Sports Economics, , vol. 8(3), pages 223-243, June.
    18. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers 695, The Research Institute of the Finnish Economy.
    19. Kampkötter, Patrick & Sliwka, Dirk, 2014. "Wage premia for newly hired employees," Labour Economics, Elsevier, vol. 31(C), pages 45-60.
    20. Piekkola, Hannu, 2002. "Transferability of Human Capital and Job Switches," Discussion Papers 794, The Research Institute of the Finnish Economy.
    21. Florian L. Kutzner & Daniel Read & Neil Stewart & Gordon Brown, 2017. "Choosing the Devil You Don’t Know: Evidence for Limited Sensitivity to Sample Size–Based Uncertainty When It Offers an Advantage," Management Science, INFORMS, vol. 63(5), pages 1519-1528, May.

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    More about this item

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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