Rational Inattention and Employer Learning

Steffen Habermalz

No 5311, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Research on employer learning has provided important insights into the dynamic process that determines individual wages, especially during the early part of a worker's career. However, the recent evidence on the absence of employer learning for college graduates by Arcidiacono et al. (2008) and results that economic conditions at labor market entry have persistent effects on wages (for example Oreopoulos et al. (2008)) cast doubt on the model’s validity. This paper extends the employer learning model with the theory of rational inattention introduced by Sims (2006). In the model firms optimally allocate attention (=information processing capacity) to learning about the productivity of different worker groups. I find that firms allocate more attention to learning about the productivities of workers who have a higher impact on profits. Furthermore, firms learn about workers’ productivities as quickly as possible. Taken together these results resolve the discrepancy between the data and the employer learning model.

Keywords: rational inattention; endogenous information; employer learning (search for similar items in EconPapers)
JEL-codes: D21 D22 J21 J24 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-11
New Economics Papers: this item is included in nep-cbe and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Oxford Economic Papers, 2014, 66 (2), 605-626

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Journal Article: Rational inattention and employer learning (2014)
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