Wage Dispersion and Labor Turnover with Adverse Selection
University of Leicester; Institute for the Study of Labor (IZA)
University of Konstanz - Faculty of Economics and Statistics; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 5936
We consider a model of on-the-job search where firms offer long-term wage contracts to workers of different ability. Firms do not observe worker ability upon hiring but learn it gradually over time. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts designed to retain high-ability workers only. Low-ability workers have higher turnover rates, they are more often employed in low-wage firms and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium.
Number of Pages in PDF File: 43
Keywords: adverse selection, on-the-job search, wage dispersion, sorting
JEL Classification: D82, J63, J64working papers series
Date posted: September 4, 2011
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