Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82220
Authors: 
Eriksson, Stefan
Year of Publication: 
2002
Series/Report no.: 
Working Paper, IFAU - Institute for Labour Market Policy Evaluation 2002:17
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.
Subjects: 
Hiring
imperfect information
discrimination
employed job seekers
efficiency wages
turnover
unemployment
welfare
policy
JEL: 
E24
J64
J71
Document Type: 
Working Paper

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