TY  - JOUR
AU  - Weiss,Andrew
AU  - Wang,Ruqu
TI  - A Sorting Model of Labor Contracts:  Implications for Layoffs and Wage-Tenure Profiles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3448
PY  - 1990
Y2  - September 1990
UR  - http://www.nber.org/papers/w3448
L1  - http://www.nber.org/papers/w3448.pdf
N1  - Author contact info:
Andrew Weiss
Weiss Asset Management
29 Commonwealth Avenue, 10th Floor
Boston, MA 02116
Tel: 617-778-7780
Fax: 617-778-7781
E-Mail: aweiss@weissasset.com

Ruqu Wang
National University of Singapore
E-Mail: ecswr@nus.edu.sg
AB  - This paper analyzes a sorting model of labor contracts when workers have private information about their own productivities, and firms can test (monitor) workers. We show that sorting considerations alone generate steep wage-tenure profiles, high turnover rates of newly hired workers, and mandatory retirement rules. We find that if test results are only informative to the testing firm, and hiring is costless, then all workers that fail the test are fired. When hiring is costly, we derive conditions under which the firm retains sane (or all) workers that fail its test. We also derive conditions under which the firm tests sane, but not all, of its workers. In the second part of this paper, we consider the case when there are no hiring costs and there are many identical firms competing for the good type workers. we characterize the optimal contracts am show that competition for workers can lower total output. This is because competition can induce firms to increase the proportion of their workers that they test, rot it the test is costly, this lowers output. Finally, we show that because a mandated minimum wage affects the probability of a firm testing its worker's, an increase in the minimum wage can increase (or decrease) aggregate output.
ER  -