Labour Turnover, Wage Structures and Moral Hazard
A multi-period, general equilibrium labour market model is developed where risk-averse workers face job-related uncertainty and labour turnover is costly. If a worker is unlucky and suffers a bad match, he quits and joins another firm. We assume that the quality of a job match is unobservable; as a results insurance markets are incomplete. Also the firm is assumed to provide implicit insurance against job dissatisfaction. Typically this is done by paying workers more than their marginal product in early years with the firm and less thereafter. Since the probabilities of quit rates are affected by the amount of insurance provided, this implicit insurance is characterized by moral hazard. We show this gives rise to inefficiency.
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