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Misallocation of Talent in Competitive Labor Markets

Author

Listed:
  • Daniel Ferreira

    () (London School of Economics)

  • Radoslawa Nikolowa

    () (Queen Mary University of London)

Abstract

We develop a model in which competition in the labor market may produce worker-firm matches that are inferior to those obtained in the absence of competition. This result contrasts with the conventional wisdom that competition among employers allocates scarce talent efficiently. In a model in which employers asymmetrically learn about the ability of their workers, we show that constraining labor market competition may be socially desirable precisely because it leads to better talent allocation. The model provides a cautionary counterpoint to one of the most popular arguments against the regulation of pay, i.e., the argument that price-distorting regulation leads to inefficient matches of workers and firms.

Suggested Citation

  • Daniel Ferreira & Radoslawa Nikolowa, 2015. "Misallocation of Talent in Competitive Labor Markets," Working Papers 740, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp740
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    File URL: http://www.econ.qmul.ac.uk/media/econ/research/workingpapers/2015/items/wp740.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Labor markets; Asymmetric employer learning; Misallocation; Adverse selection;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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