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Information Externalities in the Labour Market and the Duration of Unemployment

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  • Ben Lockwood

Abstract

A matching model is analysed in which firms imperfectly test workers prior to hiring them. If (some) firms hire only workers who pass the test, there is an informational externality; unemployment duration is a signal of productivity. In equilibrium, if it is profitable for a firm to test, it is also profitable for it to condition its hiring decision on duration, hiring those whose duration is less than a critical value. This testing equilibrium is inefficient, with too much testing and too low a critical duration value. Sensitivity analysis of the latter suggests explanations for the dependence of re-employment probabilities on duration and the instability of the U-V curve.

Suggested Citation

  • Ben Lockwood, 1991. "Information Externalities in the Labour Market and the Duration of Unemployment," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 733-753.
  • Handle: RePEc:oup:restud:v:58:y:1991:i:4:p:733-753.
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