Involuntary unemployment and worker self-selection (Q1099052): Difference between revisions

Consider a firm that lacks information about the reservation wage or ability of any specific worker, but is aware that workers with higher reservation wages tend to be more able, on average. We show that under a simple condition - that the efficiency wage exceeds the lowest reservation wage - the optimal hiring policy for the firm involves (1) no wage discrimination, and (2) rationing of jobs, when demand for its product is low. The result also extends to the case where hours of work are variable, provided each worker is most productive when working a strictly positive number of hours per week.