Working Paper Series
No 2002:17:
Imperfect information, wage formation, and the employability of the unemployed
Stefan Eriksson ()
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
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