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 standard labor market models, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a standard search and matching model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.

January 2012 [download pdf] - Also available as IZA Discussion Paper 6294
First version: March 2011

Thijs van Rens | CREI | Department of Economics and Business | Universitat Pompeu Fabra