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Relational Contracts and On-the-Job Search

  • Moritz Meyer-ter-Vehn

    (UCLA Economics)

  • Simon Adrian Board

    (UCLA Economics)

This paper characterizes the distribution of jobs in a relational contracting model where underemployed workers compete with unemployed workers in the job market. Such on-the-job search increases turnover and thereby the marginal costs to incentivize effort. This leads firms to replace permanent jobs that pay high wages and command high effort, with temporary jobs that pay low wages and command low effort. This deterioration of job quality reduces the prospects of the unemployed and introduces slack into the workers' incentive constraints. If the number of firms is fixed, firms react by cutting wages, so profits increase while welfare and workers' rents decrease. If the number of firms is endogenous, new firms enter the market, so the loss of high-quality jobs is countered by an increase in the total number of jobs. When unemployed and underemployed workers' are equally skilled in getting job offers, free entry leads to full employment and effort is incentivized by the threat of underemployment rather than unemployment.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_1204.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1204.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1204
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Royalty, Anne Beeson, 1998. "Job-to-Job and Job-to-Nonemployment Turnover by Gender and Education Level," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 392-443, April.
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  9. Ernst Fehr & Simon G├Ąchter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
  10. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
  11. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
  12. Shapley, Lloyd & Scarf, Herbert, 1974. "On cores and indivisibility," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 23-37, March.
  13. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
  14. Rebitzer, James B., 1995. "Is there a trade-off between supervision and wages? An empirical test of efficiency wage theory," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 107-129, September.
  15. Viscusi, W Kip, 1980. "Sex Differences in Worker Quitting," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 388-98, August.
  16. Brian A. Jacob, 2010. "The Effect of Employment Protection on Worker Effort: Evidence from Public Schooling," NBER Working Papers 15655, National Bureau of Economic Research, Inc.
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