Faculty of Economics and Business Administration Publications Database

Worker mobility in a search model with adverse selection

Carrillo-Tudela, Carlos
Volume: 160
Pages: 340 - 386
ISSN-Print: 0022-0531
Link External Source: Online Version
Year: 2015
Keywords: Adverse selection; On-the-job search; Worker mobility; Wage dynamics

We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different abilities, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market.