IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3448.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    Note: LS
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3448.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marshall, Robert C & Zarkin, Gary A, 1987. "The Effect of Job Tenure on Wage Offers," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 301-324, July.
    2. Gibbons, Robert & Katz, Lawrence F, 1991. "Layoffs and Lemons," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 351-380, October.
    3. repec:fth:prinin:258 is not listed on IDEAS
    4. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    5. Joseph G. Altonji & Robert A. Shakotko, 1987. "Do Wages Rise with Job Seniority?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 437-459.
    6. MacLeod, W Bentley & Malcomson, James M, 1988. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 832-854, August.
    7. Kletzer, Lori Gladstein, 1989. "Returns to Seniority after Permanent Job Loss," American Economic Review, American Economic Association, vol. 79(3), pages 536-543, June.
    8. George A. Akerlof & Lawrence F. Katz, 1986. "Do Deferred Wages Dominate Involuntary Unemployment as a Worker Discipline Device?," NBER Working Papers 2025, National Bureau of Economic Research, Inc.
    9. Mathias Dewatripont, 1989. "Renegotiation and Information Revelation Over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(3), pages 589-619.
    10. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    11. Alan B. Krueger, 1991. "The Evolution of Unjust-Dismissal Legislation in the United States," ILR Review, Cornell University, ILR School, vol. 44(4), pages 644-660, July.
    12. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-176, February.
    13. Abraham, Katharine G & Farber, Henry S, 1987. "Job Duration, Seniority, and Earnings," American Economic Review, American Economic Association, vol. 77(3), pages 278-297, June.
    14. J. Luis Guasch & Andrew Weiss, 1980. "Wages as Sorting Mechanisms in Competitive Markets with Asymmetric Information: A Theory of Testing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(4), pages 653-664.
    15. Joanne Salop & Steven Salop, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 619-627.
    16. Barry Nalebuff & David Scharfstein, 1987. "Testing in Models of Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(2), pages 265-277.
    17. Alan Krueger, 1989. "The Evolution of Unjust-Dismissal Legislation in the United States," Working Papers 638, Princeton University, Department of Economics, Industrial Relations Section..
    18. Burdett, K. & Mortensen, Dale T., 1981. "Testing for ability in a competitive labor market," Journal of Economic Theory, Elsevier, vol. 25(1), pages 42-66, August.
    19. Joanne Salop & Steven C. Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers 80, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Riphahn Regina T. & Thalmaier Anja, 2001. "Behavioral Effects of Probation Periods: An Analysis of Worker Absenteeism / Anreizeffekte der Probezeit: Eine Untersuchung von Fehlzeiten bei Arbeitnehmern," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(2), pages 179-201, April.
    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Ruqu & Weiss, Andrew, 1998. "Probation, layoffs, and wage-tenure profiles: A sorting explanation," Labour Economics, Elsevier, vol. 5(3), pages 359-383, September.
    2. Andrew Weiss, 1995. "Human Capital vs. Signalling Explanations of Wages," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 133-154, Fall.
    3. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    4. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    5. Ohkusa, Yasushi, 1995. "Testing for the matching hypothesis in Japanese manufacturing," Japan and the World Economy, Elsevier, vol. 7(2), pages 175-198, July.
    6. repec:eee:labchp:v:3:y:1999:i:pb:p:2439-2483 is not listed on IDEAS
    7. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Maia Güell, 2010. "Is seniority-based pay used as a motivational device? Evidence from plant-level data," Research in Labor Economics, in: Jobs, Training, and Worker Well-being, pages 155-187, Emerald Group Publishing Limited.
    8. David N. Margolis, 1996. "Cohort Effects and Returns to Seniority in France," Annals of Economics and Statistics, GENES, issue 41-42, pages 443-464.
    9. Dohmen, Thomas J., 2004. "Performance, seniority, and wages: formal salary systems and individual earnings profiles," Labour Economics, Elsevier, vol. 11(6), pages 741-763, December.
    10. William J. Carrington & Bruce Fallick, 2014. "Why Do Earnings Fall with Job Displacement?," Working Papers (Old Series) 1405, Federal Reserve Bank of Cleveland.
    11. 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.
    12. Buchinsky, Mosche & Kramarz, Francis & Fougère, Denis & Kamionka, Thierry & Beffy, Magali, 2006. "The Returns to Seniority in France (and Why are They Lower than in the United States?)," CEPR Discussion Papers 5486, C.E.P.R. Discussion Papers.
    13. Arnaud Lefranc, 2002. "Labor Market Dynamics and Wage Losses of Displaced Workers in France and the United-States," THEMA Working Papers 2002-15, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    14. Joseph G. Altonji & Nicolas Williams, 1992. "The Effects of Labor Market Experience, Job Seniority, and Job Mobility on Wage Growth," NBER Working Papers 4133, National Bureau of Economic Research, Inc.
    15. Alberto Bayo-Moriones, 2001. "Seniority-based pay: is it used as a motivation device?," Working Papers 0103, Departament Empresa, Universitat Autònoma de Barcelona, revised May 2001.
    16. Devereux, Paul J. & Hart, Robert A. & Roberts, J. Elizabeth, 2013. "Job Spells, Employer Spells, and Wage Returns to Tenure," IZA Discussion Papers 7384, Institute of Labor Economics (IZA).
    17. Mengistae, Taye, 1999. "The relative effects of skill formation and job matching on wage growth in Ethiopia," Policy Research Working Paper Series 2104, The World Bank.
    18. Kampkötter, Patrick & Sliwka, Dirk, 2014. "Wage premia for newly hired employees," Labour Economics, Elsevier, vol. 31(C), pages 45-60.
    19. Canegallo, Claudia, 1999. "Funzionamento del mercato del lavoro in presenza di informazione asimmetrica. Una rassegna della letteratura," POLIS Working Papers 8, Institute of Public Policy and Public Choice - POLIS.
    20. Statt, A.L., 1998. "Great Prospects: Employer Provided Training as a Credible Screening Device," Working Papers Series 9802, University of Stirling, Division of Economics.
    21. Roland A. Amann & Tobias J. Klein, 2012. "Returns to type or tenure?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 175(1), pages 153-166, January.
    22. William J. Carrington, 2015. "Do We Know Why Earnings Fall with Job Displacement? Working Paper: 2015-01," Working Papers 49908, Congressional Budget Office.
    23. Brunello, Giorgio & Ariga, Kenn, 1997. "Earnings and seniority in Japan: A re-appraisal of the existing evidence and a comparison with the UK," Labour Economics, Elsevier, vol. 4(1), pages 47-69, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3448. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.