Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention

Abstract

A common assumption in equilibrium search and matching models of the labour market is that each firm posts a wage, to be paid to any worker hired. This paper considers the implications of firms posting "contracts", in a random matching model with on-the-job search. More complex contracts enable firms to address both recruitment and retention problems by, for example, increasing the wage with tenure. The effect on the labour market is to reduce turnover, below the level required for efficient matching of workers to firms. Copyright The Review of Economic Studies Limited, 2004.

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