Working Paper Series
IFAU - Institute for Evaluation of Labour Market and Education Policy
Imperfect information, wage formation, and the employability of the unemployed
Abstract: This paper considers the optimal hiring strategy of a firm
that is unable to observe the productive abilities of all its applicants.
Whom the firm considers as hireable, will depend crucially on the extent to
which the firm can use its wage setting to mirror productivity differences.
However, when setting its wages the firm has to consider other factors as
well, e.g. turnover, that may make it optimal not to set wages that fully
reflect productivity differences. Instead, it may be optimal to avoid
hiring workers that have certain characteristics; i.e. to use a
discriminatory hiring strategy. In the paper it is shown that
discrimination based on employment status is an equilibrium hiring strategy
even when the firm is free to set different wages for workers with
different expected productivities. It is also shown that if all firms use
such hiring procedures this will have strong implications for the aggregate
economy and welfare.
Keywords: Hiring; imperfect information; discrimination; employed job seekers; efficiency wages; turnover; unemployment; welfare; policy; (follow links to similar papers)
JEL-Codes: E24; J64; J71; (follow links to similar papers)
41 pages, October 28, 2002
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Monica Fällgren ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom