Worker replacement

Guido Menzio, Espen R. Moen

    Research output: Contribution to journalArticlepeer-review


    Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs. Firms can commit to a wage policy, i.e. a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables. However, firms cannot commit to employ workers. In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires. The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks.

    Original languageEnglish (US)
    Pages (from-to)623-636
    Number of pages14
    JournalJournal of Monetary Economics
    Issue number6
    StatePublished - Sep 2010

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics


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