Selective Hiring and Welfare Analysis in Labor Market Models
Kiel Institute for the World Economy; University of Kiel; Institute for the Study of Labor (IZA)
Thijs van Rens
University of Warwick - Department of Economics; CEPR; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 6294
Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.
Number of Pages in PDF File: 29
Keywords: labor market models, welfare, optimal unemployment insurance
JEL Classification: E24, J65
Date posted: February 4, 2012
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