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Labor Market Equilibrium With Rehiring

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  • JAVIER FERNÁNDEZ‐BLANCO

Abstract

Consistent with the empirical evidence, this article analyzes a labor market in which separations are not permanent and reactivated firms prefer to rehire former employees instead of seek new ones. Workers engage in job search due to the uncertain prospects of rehiring. If firms can commit to wages contingent on rehiring, they backload wages to provide incentives for workers to reduce their unobservable search effort. Under risk aversion and incomplete markets, if productivity at reactivation is sufficiently high, the tension between wage backloading and consumption smoothing leads to excessive search in equilibrium.

Suggested Citation

  • Javier Fernández‐Blanco, 2013. "Labor Market Equilibrium With Rehiring," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(3), pages 885-914, August.
    • Handle: RePEc:wly:iecrev:v:54:y:2013:i:3:p:885-914
    DOI: 10.1111/iere.12021
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    References listed on IDEAS

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