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A Sorting Model of Labor Contracts: Implications for Layoffs and Wage-Tenure Profiles

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  • Andrew Weiss
  • Ruqu Wang

Abstract

This paper analyzes a sorting model of labor contracts when workers have private information about their own productivities, and firms can test (monitor) workers. We show that sorting considerations alone generate steep wage-tenure profiles, high turnover rates of newly hired workers, and mandatory retirement rules. We find that if test results are only informative to the testing firm, and hiring is costless, then all workers that fail the test are fired. When hiring is costly, we derive conditions under which the firm retains sane (or all) workers that fail its test. We also derive conditions under which the firm tests sane, but not all, of its workers. In the second part of this paper, we consider the case when there are no hiring costs and there are many identical firms competing for the good type workers. we characterize the optimal contracts am show that competition for workers can lower total output. This is because competition can induce firms to increase the proportion of their workers that they test, rot it the test is costly, this lowers output. Finally, we show that because a mandated minimum wage affects the probability of a firm testing its worker's, an increase in the minimum wage can increase (or decrease) aggregate output.

Suggested Citation

  • Andrew Weiss & Ruqu Wang, 1990. "A Sorting Model of Labor Contracts: Implications for Layoffs and Wage-Tenure Profiles," NBER Working Papers 3448, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3448
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    References listed on IDEAS

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    Cited by:

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    2. Margolis, D..N., 1995. "Firm Heterogeneity and Worker Self-Selection Bias Estimated Returns to Seniority," Cahiers de recherche 9502, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    3. Stefan Bender & Till von Wachter, 2006. "In the Right Place at the Wrong Time: The Role of Firms and Luck in Young Workers' Careers," American Economic Review, American Economic Association, vol. 96(5), pages 1679-1705, December.
    4. Lars Vilhuber, 1997. "Sector-Specific On-the-Job Training: Evidence from U.S. Data," CIRANO Working Papers 97s-42, CIRANO.
    5. Wang, Ruqu & Weiss, Andrew, 1998. "Probation, layoffs, and wage-tenure profiles: A sorting explanation," Labour Economics, Elsevier, vol. 5(3), pages 359-383, September.
    6. Lisa M. Lynch, 1992. "Differential Effects of Post-School Training on Early Career Mobility," NBER Working Papers 4034, National Bureau of Economic Research, Inc.
    7. Wang, Ruqu, 1997. "Competition, Wage Commitments, and Application Fees," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 124-142, January.
    8. Singh Tomar, Ashish, 2022. "The Socio-Economic Challenges Facing Asia Due to Insufficient Earnings and Employment," MPRA Paper 115540, University Library of Munich, Germany.

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