Working Paper: NBER ID: w17962
Authors: Christopher L. House; Jing Zhang
Abstract: We develop a dynamic equilibrium model of labor demand with adverse selection. Firms learn the quality of newly hired workers after a period of employment. Adverse selection makes it costly to hire new workers and to release productive workers. As a result, firms hoard labor and under-react to labor demand shocks. The adverse selection problem also creates a market for temporary workers. In equilibrium, firms hire a buffer stock of permanent workers and respond to changing business conditions by varying their temp workers. A hiring subsidy or tax can improve welfare by discouraging firms from hoarding too many productive workers.
Keywords: Labor Demand; Adverse Selection; Temporary Workers; Hiring Subsidies; Welfare
JEL Codes: D82; E24; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average quality of available workers (J24) | hiring costs (J32) |
| hiring costs (J32) | employment expansion (J68) |
| average quality of available workers (J24) | layoffs (J63) |
| layoffs (J63) | labor retention strategies (J63) |
| hiring subsidies (J68) | welfare (I38) |
| adverse selection perception (D82) | hoarding labor (J23) |
| hoarding labor (J23) | low-quality unemployment pool (J68) |
| low-quality unemployment pool (J68) | adverse selection perception (D82) |