Selective Hiring and Welfare Analysis in Labor Market Models

Christian Merkl and Thijs van Rens

 

Abstract

Firms select not only how many, but also which workers to hire. Yet, in most labor market models all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. We set up a model that is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but implications for welfare are different for two reasons. First, a hiring externality occurs with random but not with selective hiring. Second, the welfare costs of unemployment are much larger with selective hiring, because unemployment risk is distributed unequally across workers.

 

October 2018 [download pdf] Also available as CEPR Discussion Paper 13272

Earlier version available as IZA Discussion Paper 6294

First version: March 2011

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Highlights

The common assumption that all workers are equally employable is unrealistic

Relaxing the assumption maintains positive predictions but changes welfare analysis

With selective hiring, there is no externality leading to overhiring

But unemployment is unequally distributed across workers, making it very costly

Optimal unemployment insurance is therefore higher than previously thought

 


Thijs van Rens | IDEAS/RePEc | Google Scholar | ResearchGate