Hiring Risk and Labour Market Equilibrium

This paper introduces asymmetric information about workers' abilities into the turnover-training model of Phelps (1994) and Salop (1979). This makes hiring an investment under uncertainty. We show that an increase in the level of uncertainty reduces the rate of hiring, increases the optimal wage, and reduces steady-state employment. We conclude that the optimal rate of hiring by firms with hiring pools that have a proportionately high number of young workers is lower, and the rate of employment among these workers lower, since it is more difficult to predict their future performance. Also, the use of statistical discrimination is shown to increase employment because it reduces uncertainty about the ability of new hires. Conversely, anti-discrimination laws and quotas increase the rate of unemployment in this model.