Wage Dispersion and Labor Turnover with Adverse Selection

Leo Kaas and Carlos Carrillo-Tudela

No 1075, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes the effects of adverse selection on worker turnover, wage dispersion, and resource allocation in labor markets. 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. Provided that information frictions are sufficiently strong, low-wage firms offer screening contracts and hire all types of workers in equilibrium, whereas high-wage firms specialize in attracting high-ability workers only. This implies that low-ability workers have higher turnover rates, earn lower wages on average and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium.

Date: 2011
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Related works:
Working Paper: Wage Dispersion and Labor Turnover with Adverse Selection (2011)
Working Paper: Wage Dispersion and Labor Turnover with Adverse Selection (2011)
Working Paper: Wage Dispersion and Labour Turnover with Adverse Selection (2011)
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