NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hiring Risky Workers

Edward P. Lazear

NBER Working Paper No. 5334
Issued in November 1995
NBER Program(s):   LS

It has long been recognized in finance and other literature that variance provides option value. The same point carries over to the labor market. Firms like variance in new employees because they can keep the good workers and terminate the bad ones. But market wages must adjust to make the marginal firm indifferent between high and low variance workers. The market equilibrium for new, risky workers is explored to determine how workers and firms line up on the various sides of the market. Firms in growing industries prefer young, high variance workers. Growing industries will be characterized by high turnover rates. In order for risky workers to provide option value, it is necessary that the initial employer have some advantage over other firms. Private information or mobility costs can provide that advantage. Also required is that the risk have a firm specific component. General variations in ability provide no option value to an initial hirer.

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Document Object Identifier (DOI): 10.3386/w5334

Published: Ohashi, Isao and Toshiaki Tachibanaki. Internal labour markets, incentives and employment. New York: St. Martin's Press; London: Macmillan Press, 1998.

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