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Wage Dispersion and Labor Turnover with Adverse Selection

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  • Leo Kaas

    (University of Konstanz)

  • Carlos Carrillo-Tudela

    (University of Essex)

Abstract

This paper analyzes the effects of adverse selection on worker turnover, wage dispersion, and resource allocation in labor markets. 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. Provided that information frictions are sufficiently strong, low-wage firms offer screening contracts and hire all types of workers in equilibrium, whereas high-wage firms specialize in attracting high-ability workers only. This implies that low-ability workers have higher turnover rates, earn lower wages on average and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1075.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1075

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  1. Jesper Bager & Francois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "A Feasible Equilibrium Search Model of Individual Wage Dynamics with Experience Accumulation," 2006 Meeting Papers 679, Society for Economic Dynamics.
  2. Robert Shimer & Randall Wright & Veronica Guerrieri, 2009. "Adverse Selection in Competitive Search Equilibrium," 2009 Meeting Papers 139, Society for Economic Dynamics.
  3. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 619-27, November.
  4. 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, vol. 50(2), pages 485-506, 05.
  5. Dale T. Mortensen & Rasmus Lentz, 2005. "An Empirical Model of Growth Through Product Innovation," 2005 Meeting Papers 910, Society for Economic Dynamics.
  6. Joanne Salop & Steve Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers 80, Board of Governors of the Federal Reserve System (U.S.).
  7. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 535-551, 04.
  8. Hartog,Joop & Maassen van den Brink,Henriëtte (ed.), 2009. "Human Capital," Cambridge Books, Cambridge University Press, number 9780521117562, April.
  9. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers 3658, C.E.P.R. Discussion Papers.
  10. Kenneth Burdett & Carlos Carrillo‐Tudela & Melvyn G. Coles, 2011. "Human Capital Accumulation And Labor Market Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 657-677, 08.
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  14. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2a, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2007. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," NBER Working Papers 13674, National Bureau of Economic Research, Inc.
  16. University of Pennsylvania & Ludo Visschers, 2007. "Employment Uncertain and Wage Contracts," 2007 Meeting Papers 547, Society for Economic Dynamics.
  17. Greenwald, Bruce C, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 325-47, July.
  18. Iourii Manovskii & Gueorgui Kambourov, 2004. "Occupational Specificity of Human Capital," 2004 Meeting Papers 197, Society for Economic Dynamics.
  19. Gabriele Camera & Alain Delacroix, 2004. "Trade Mechanism Selection in Markets with Frictions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 851-868, October.
  20. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
  21. Rasmus Lentz & Jesper Bagger, 2009. "An Empirical Model of Wage Dispersion with Sorting," 2009 Meeting Papers 964, Society for Economic Dynamics.
  22. Walter Y. Oi & Todd L. Idson, 1999. "Workers Are More Productive in Large Firms," American Economic Review, American Economic Association, vol. 89(2), pages 104-108, May.
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  24. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
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