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Worker replacement

  • Guido Menzio
  • Espen R. Moen

Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs. Firms can commit to a wage policy, i.e. a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables. However, firms cannot commit to employ workers. In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires. The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15983.

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Date of creation: May 2010
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Publication status: published as Menzio, Guido & Moen, Espen R., 2010. "Worker replacement," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 623-636, September.
Handle: RePEc:nbr:nberwo:15983
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