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Relational Contracts and On-the-Job Search

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  • Moritz Meyer-ter-Vehn

    (UCLA Economics)

  • Simon Adrian Board

    (UCLA Economics)

Abstract

This paper characterizes the distribution of jobs in a relational contracting model where underemployed workers compete with unemployed workers in the job market. Such on-the-job search increases turnover and thereby the marginal costs to incentivize effort. This leads firms to replace permanent jobs that pay high wages and command high effort, with temporary jobs that pay low wages and command low effort. This deterioration of job quality reduces the prospects of the unemployed and introduces slack into the workers' incentive constraints. If the number of firms is fixed, firms react by cutting wages, so profits increase while welfare and workers' rents decrease. If the number of firms is endogenous, new firms enter the market, so the loss of high-quality jobs is countered by an increase in the total number of jobs. When unemployed and underemployed workers' are equally skilled in getting job offers, free entry leads to full employment and effort is incentivized by the threat of underemployment rather than unemployment.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1204.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1204

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  1. Manolis Galenianos & Philipp Kircher, 2005. "Directed Search with Multiple Job Applications," PIER Working Paper Archive 05-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. W. Bentley MacLeod & James Malcomson, 1997. "Motivation and Markets," Boston College Working Papers in Economics 339., Boston College Department of Economics.
  3. Royalty, Anne Beeson, 1998. "Job-to-Job and Job-to-Nonemployment Turnover by Gender and Education Level," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 392-443, April.
  4. Paul Oyer, 2006. "Initial Labor Market Conditions and Long-Term Outcomes for Economists," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 143-160, Summer.
  5. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
  6. Brian A. Jacob, 2010. "The Effect of Employment Protection on Worker Effort: Evidence from Public Schooling," NBER Working Papers 15655, National Bureau of Economic Research, Inc.
  7. Esther Duflo & Rema Hanna & Stephen P. Ryan, 2012. "Incentives Work: Getting Teachers to Come to School," American Economic Review, American Economic Association, vol. 102(4), pages 1241-78, June.
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