Job hoarding

This is a theoretical paper with no empirical component. We study a game-theoretic model of a labor market in which employers and workers must search for a trading partner, and workers have private information about the value of a match. We show that competitive pressure can induce workers to lie and over-state the value of the match: when the number of workers per employer is high, workers with a low productivity in their current match claim to have a high productivity in order to avoid the harsh labor market conditions they face. This leads to insufficient frictional unemployment and search, and lower average productivity and utility. Since such inefficient “job hoarding” by workers occurs when there are many workers per job, the analysis suggests a novel explanation for the stylized macroeconomic fact that labor productivity is pro-cyclical. We consider two potential remedies to the job-hoarding problem. The first is a publicpolicy instrument, namely a fully tax-financed unemployment benefit. By subsidizing the activity that is under-supplied in equilibrium, namely search for more productive matches, such a payment can restore efficiency. Moreover, since the encouragement of search becomes necessary only when the labor market is tight, our analysis suggests that this kind of unemployment insurance scheme should be counter-cyclical. The second remedy is screening contracts that pay workers a wage that is a linear function of the surplus/profit that their labor creates. A compensation contract of this kind that restores efficiency always exists. However, these efficient contracts have some economically problematic features. Changing the split of the surplus is not enough to discourage job hoarding. It is also necessary that the parties bring additional resources to the relationship. Therefore, in addition to a bonus component that has the wage increase with the surplus, the contract must also have a lump-sum payment of one of two kinds. The first is that high-productivity workers buy their job from the employer. This is likely to be fraught with financing and moral-hazard problems. The second is that the employer pays low-productivity workers for not taking the job, which may violate workers’ sense of fairness and damage their morale and productivity.