Working Paper: CEPR ID: DP13272
Authors: Thijs van Rens; Christian Merkl
Abstract: Firms select not only how many, but also which workers to hire. Yet, in most labor market models all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. We set up a model that is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but implications for welfare are different for two reasons. First, a hiring externality occurs with random but not with selective hiring. Second, the welfare costs of unemployment are much larger with selective hiring, because unemployment risk is distributed unequally across workers.
Keywords: labor market models; welfare; optimal unemployment insurance
JEL Codes: E24; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Selective hiring (M51) | Larger welfare costs of unemployment (J65) |
| Selective hiring (M51) | Unequal distribution of unemployment risk across workers (J64) |
| Unequal distribution of unemployment risk across workers (J64) | Unemployment risk is not insurable (J65) |
| Selective hiring (M51) | Lower maximum welfare achievable (D69) |
| Random hiring (C78) | Hiring externality exists (D62) |
| Hiring externality (J23) | Overhiring (J63) |
| Selective hiring (M51) | Higher unemployment benefits needed for equitable income distribution (J68) |
| Trade-off between efficient job creation and equitable redistribution (F16) | Affects optimal unemployment insurance policy (J65) |