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LABOR MARKET EQUILIBRIUM WITH REHIRING
Author(s) -
FERNÁNDEZBLANCO JAVIER
Publication year - 2013
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12021
Subject(s) - unobservable , commit , economics , incentive , wage , productivity , labour economics , incomplete markets , consumption (sociology) , microeconomics , consumption smoothing , general equilibrium theory , empirical evidence , unemployment , econometrics , macroeconomics , social science , philosophy , epistemology , database , sociology , computer science
Consistent with the empirical evidence, this article analyzes a labor market in which separations are not permanent and reactivated firms prefer to rehire former employees instead of seek new ones. Workers engage in job search due to the uncertain prospects of rehiring. If firms can commit to wages contingent on rehiring, they backload wages to provide incentives for workers to reduce their unobservable search effort. Under risk aversion and incomplete markets, if productivity at reactivation is sufficiently high, the tension between wage backloading and consumption smoothing leads to excessive search in equilibrium.