Wage bargaining and turnover costs with heterogeneous labor and asymmetricinformation

We study a model of individual wage bargaining between heterogeneous worker s and firms, with instantaneous matching, free firm entry, workers' individ ual productivities are discovered by firms only after being hired, and it i s expensive for firms to hire and fin workers. We show that inefficiencies due to bargaining and externalities in the matching process lead firms to e mploy too few worker types. Employment among employed worker types is also inefficiently low when workers have high bargaining power, but may be too h igh when workers' bargaining power is low. The government can correct these inefficiencies by reducing or increasing firms' hiring and firing costs. T his implies that the costs of firing tenured workers 'almost always' should be reduced. We argue that the model gives a good description of recent lab or market phenomena in advanced economies. (C) 2000 Elsevier Science B.V. A ll rights reserved.