Turnover, Wages, and Adverse Selection

Worker mobility is necessary for the efficient operation of the labor market, so that the best matches can be found between workers and employers. Employers have only limited information about the abilities of each prospective worker, however. When making hiring decisions, they take the chance of employing a worker who does not have the skills (and thus the productivity) that was originally expected. Both highand low-productivity workers seek higher-paying jobs at any given time. The problem facing the employer is how to distinguish between the two. Low-productivity job searchers, of course, try to pass themselves off as highproductivity workers. The employer can discern a worker's true abilities only after the hiring decision has been made, however. Because of this asymmetrical information, workers' ability to change jobs and find the best match may be seriously impaired. Consequently, the labor market may not work efficiently. This paper suggests that asymmetrical information can result in adverse selection. Adverse selection is a term coined by Akerlof (1970) to explain why the used-car market is dominated by "lemons." Car owners, he argues, often sell Charles T. Carlstrom is an economist at the Federal Reserve Bank of Cleveland. This paper is based on the author's Ph.0. dissertation at the University of Rochester. The author wishes to thank Randall Eberts, William Gavin, Erica Groshen, James Hoehn, Kenneth McLaughlin, Walter Oi, and Richard Rogerson, all of whom provided helpful comments on earlier drafts of the paper.