Labor Market Categorization: Theory and Evidence on Initial Wages from the Nlsy
Posted: 2 Apr 1997
Date Written: November 1996
A pre-employment assessment of potential workers is often used by firms to mitigate the costs of poor employee selection and job placement. This paper presents an adverse selection model of the labor market wherein firms first use observable characteristics of employees as a sorting device and then offer a menu of wage contracts to induce worker self-selection by type within categories. The model yields a prediction on initial wages distinct from models of human capital, learning, and search. A test of the prediction is conducted using the 1986-1993 panels of the National Longitudinal Survey of Youth, and the main result provides evidence supporting the categorization model.
JEL Classification: J23, J41
Suggested Citation: Suggested Citation