A Sorting Model of Labor Contracts: Implications for Layoffs and Wage-Tenure Profiles / Andrew Weiss, Ruqu Wang.

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Weiss, Andrew

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w3448.Publication details: Cambridge, Mass. National Bureau of Economic Research 1990.Description: 1 online resource: illustrations (black and white)Subject(s):

J - Labor and Demographic Economics

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Abstract: This paper analyzes a sorting model of labor contracts when workers have private information about their own productivities, and firms can test (monitor) workers. We show that sorting considerations alone generate steep wage-tenure profiles, high turnover rates of newly hired workers, and mandatory retirement rules. We find that if test results are only informative to the testing firm, and hiring is costless, then all workers that fail the test are fired. When hiring is costly, we derive conditions under which the firm retains sane (or all) workers that fail its test. We also derive conditions under which the firm tests sane, but not all, of its workers. In the second part of this paper, we consider the case when there are no hiring costs and there are many identical firms competing for the good type workers. we characterize the optimal contracts am show that competition for workers can lower total output. This is because competition can induce firms to increase the proportion of their workers that they test, rot it the test is costly, this lowers output. Finally, we show that because a mandated minimum wage affects the probability of a firm testing its worker's, an increase in the minimum wage can increase (or decrease) aggregate output.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w3448 (Browse shelf(Opens below))	Not For Loan

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September 1990.

This paper analyzes a sorting model of labor contracts when workers have private information about their own productivities, and firms can test (monitor) workers. We show that sorting considerations alone generate steep wage-tenure profiles, high turnover rates of newly hired workers, and mandatory retirement rules. We find that if test results are only informative to the testing firm, and hiring is costless, then all workers that fail the test are fired. When hiring is costly, we derive conditions under which the firm retains sane (or all) workers that fail its test. We also derive conditions under which the firm tests sane, but not all, of its workers. In the second part of this paper, we consider the case when there are no hiring costs and there are many identical firms competing for the good type workers. we characterize the optimal contracts am show that competition for workers can lower total output. This is because competition can induce firms to increase the proportion of their workers that they test, rot it the test is costly, this lowers output. Finally, we show that because a mandated minimum wage affects the probability of a firm testing its worker's, an increase in the minimum wage can increase (or decrease) aggregate output.