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Wage Dispersion and Labour Turnover with Adverse Selection

  • Carlos Carrillo-Tudela

    ()

    (Department of Economics, University of Essex, United Kingdom)

  • Leo Kaas

    ()

    (Department of Economics, University of Konstanz, Germany)

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. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts designed to retain high-ability workers only. Low-ability workers have higher turnover rates, they are more often employed in low-wage firms and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-29.

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Length: 42 pages
Date of creation: 16 Aug 2011
Date of revision:
Handle: RePEc:knz:dpteco:1129
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  1. Stevens, M., 2000. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Stratgies for Recruitment and Retention," Economics Papers 2000-w10, Economics Group, Nuffield College, University of Oxford.
  2. Melvyn Coles & Carlos Carrillo-Tudela & Ken Burdett, 2008. "Human Capital Accumulation and Labor Market Equilibrium," 2008 Meeting Papers 1088, Society for Economic Dynamics.
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