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The Control of Labor Turnover with Incomplete Insurance Markets: The One-Group Case

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  • Richard Arnott

Abstract

This paper extends Becker's 1962 analysis of the effects of training and labor turnover costs on the structure of free market employment contracts to the case where insurance markets are incomplete as a result of imperfect information. It examines the characteristics of the employment contract using a general equilibrium model in which workers are identical and risk-adverse, and firms are risk-neutral. The major results are: i) free market employment contracts in such an economy are second-best efficient; ii) these contracts provide implicit insurance to the worker by paying him more than the value of his marginal product during some periods and less during others; iii) the turnover penalty in the employment contract depends on the worker's risk aversion; and iv) the division of the new benefits from training between capital and labor is determined by the general equilibrium characteristics of the economy. A sequel to this paper is planned, which will examine the implications of th adverse selection problems which arise when workers' differences are unobservable by firms.

Suggested Citation

  • Richard Arnott, 1978. "The Control of Labor Turnover with Incomplete Insurance Markets: The One-Group Case," Working Paper 292, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:292
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    Cited by:

    1. Richard Arnott, 1982. "The Structure of Multi-Period Employment Contracts with Incomplete Insurance Markets," Canadian Journal of Economics, Canadian Economics Association, vol. 15(1), pages 51-76, February.

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