Selective Hiring and Welfare Analysis in Labor Market Models, Christian Merkl and Thijs van Rens

Selective Hiring and Welfare Analysis in Labor Market Models

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.

Published in Labour Economics, 57, pp.117-130, April 2019

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

Earlier version available as IZA Discussion Paper 6294

First version: March 2011

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