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Hiring Risky Workers

Author

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  • Edward P. Lazear

Abstract

It has long been recognized in finance and other literature that variance provides option value. The same point carries over to the labor market. Firms like variance in new employees because they can keep the good workers and terminate the bad ones. But market wages must adjust to make the marginal firm indifferent between high and low variance workers. The market equilibrium for new, risky workers is explored to determine how workers and firms line up on the various sides of the market. Firms in growing industries prefer young, high variance workers. Growing industries will be characterized by high turnover rates. In order for risky workers to provide option value, it is necessary that the initial employer have some advantage over other firms. Private information or mobility costs can provide that advantage. Also required is that the risk have a firm specific component. General variations in ability provide no option value to an initial hirer.

Suggested Citation

  • Edward P. Lazear, 1995. "Hiring Risky Workers," NBER Working Papers 5334, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5334
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    File URL: http://www.nber.org/papers/w5334.pdf
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    References listed on IDEAS

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    1. Gibbons, Robert & Katz, Lawrence F, 1991. "Layoffs and Lemons," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 351-380, October.
    2. Gronau, Reuben, 1988. "Sex-Related Wage Differentials and Women's Interrupted Labor Careers--The Chicken or the Egg," Journal of Labor Economics, University of Chicago Press, vol. 6(3), pages 277-301, July.
    3. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    4. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    5. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 375-410.
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    Citations

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    Cited by:

    1. Peter Kuhn & Kailing Shen, 2015. "Do employers prefer migrant workers? Evidence from a Chinese job board," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-31, December.
    2. W.H.J. Hassink & G. Russo, 2003. "Wage Differences between Incumbents and External Candidates," Working Papers 03-03, Utrecht School of Economics.
    3. John D. Burger & Stephen J.K. Walters, 2008. "The Existence and Persistence of a Winner's Curse: New Evidence from the (Baseball) Field," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 232-245, July.
    4. Canziani, Patrizia & Petrongolo, Barbara, 2001. "Firing costs and stigma: A theoretical analysis and evidence from microdata," European Economic Review, Elsevier, vol. 45(10), pages 1877-1906, December.
    5. Piekkola, Hannu, 2000. "Unobserved Human Capital and Firm-Size Premium," Discussion Papers 739, The Research Institute of the Finnish Economy.
    6. Peter Groothuis & Richard Hill & Timothy Perri, 2004. "Early Entry in the NBA Draft: The Influence of Unraveling, Human Capital and Option Value," Working Papers 04-05, Department of Economics, Appalachian State University, revised 2005.
    7. Eriksson, Tor & Qin, Zhihua & Wang, Wenjing, 2014. "Firm-level innovation activity, employee turnover and HRM practices — Evidence from Chinese firms," China Economic Review, Elsevier, vol. 30(C), pages 583-597.
    8. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers 695, The Research Institute of the Finnish Economy.
    9. Gerard A. Pfann, 2001. "Downsizing," Working Papers 0110, Harris School of Public Policy Studies, University of Chicago.
    10. Huovinen, Pasi & Piekkola, Hannu, 2001. "Unemployment and Early Retirements of the Aged Workers in Finland," Discussion Papers 750, The Research Institute of the Finnish Economy.
    11. Kampkötter, Patrick & Sliwka, Dirk, 2014. "Wage premia for newly hired employees," Labour Economics, Elsevier, vol. 31(C), pages 45-60.
    12. Piekkola, Hannu, 2002. "Transferability of Human Capital and Job Switches," Discussion Papers 794, The Research Institute of the Finnish Economy.

    More about this item

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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