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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1752:
Selective Hiring and Welfare Analysis in Labor Market Models

Thijs van Rens Christian Merkl

Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective

Keywords: labor market models, welfare, optimal unemployment insurance; (follow links to similar papers)

JEL-Codes: E24,; J65; (follow links to similar papers)

29 pages, January 2012

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