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Layoffs, Lemons and Temps

  • Christopher L. House
  • Jing Zhang

We develop a dynamic equilibrium model of labor demand with adverse selection. Firms learn the quality of newly hired workers after a period of employment. Adverse selection makes it costly to hire new workers and to release productive workers. As a result, firms hoard labor and under-react to labor demand shocks. The adverse selection problem also creates a market for temporary workers. In equilibrium, firms hire a buffer stock of permanent workers and respond to changing business conditions by varying their temp workers. A hiring subsidy or tax can improve welfare by discouraging firms from hoarding too many productive workers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17962.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17962
Note: EFG LS
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