Layoffs, Lemons and Temps

Christopher House () and Jing Zhang

No 17962, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a dynamic equilibrium model of labor demand with adverse selection. Firms learn the quality of newly hired workers after a period of employment. Adverse selection makes it costly to hire new workers and to release productive workers. As a result, firms hoard labor and under-react to labor demand shocks. The adverse selection problem also creates a market for temporary workers. In equilibrium, firms hire a buffer stock of permanent workers and respond to changing business conditions by varying their temp workers. A hiring subsidy or tax can improve welfare by discouraging firms from hoarding too many productive workers.

JEL-codes: D82 E24 J23 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-bec, nep-cta, nep-dge and nep-lab
Note: EFG LS
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Citations: View citations in EconPapers (3)

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