DISTORTIONS AND POLICIES WHEN LABOR TURNOVER IS COSTLY

This paper uses a turnover model of efficiency wages that explicitly c onsiders the microfoundations of the worker's choice to stay or quit. Here, there are two distortions. Employment and productivity are both too low to be optimal. Productivity is too low because turnover is too high. With a government budget constraint, policies that alleviate on e distortion must aggravate the other. The results show that increasin g productivity improves welfare even though it also leads to greater u nemployment. Policies that increase productivity are wage-rate subsidi es, hiring taxes, and minimum wage laws. (JEL: J41)