Temporary Layoffs and Incomplete Worker Attachment in Search Equilibrium
University of Konstanz, Germany
This paper revisits the no-attachment assumption in job search models with random productivity fluctuations and Nash-bargaining. It also extends the implicit contract literature on temporary layoffs by allowing workers to search in attachment, thus firms gain from a valuable option to recall, while workers gain from a higher reservation wage when bargaining with a new employer. Ex-post differentiation of workers into attached and unattached unemployed produces endogenous binary wage dispersion. The Hosios value of the bargaining power is no longer constrained efficient. The equilibrium inefficiencies are twofold: when changing attachment workers impose a negative externality on their former employer originating from a loss of the recall option. This inefficiency tends to produce excessive job creation and is additionally amplified by the inefficient wage dispersion. The model is calibrated to the U.S. economy and the minimum inefficiency is estimated to be 0.35% of the expected net output per worker.
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