Worker replacement |
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Authors: | Guido Menzio Espen R Moen |
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Institution: | a University of Pennsylvania and NBER, 3718 Locust Walk, Philadelphia, PA 19104, USA b Norwegian School of Management, Handelshøyskolen BI, 0442 Oslo, Norway |
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Abstract: | Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs. Firms can commit to a wage policy, i.e. a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables. However, firms cannot commit to employ workers. In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires. The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks. |
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