Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria in a labor market where heterogeneous …rms post wage/tenure contracts and risk-averse workers, both employed and unemployed, search for new job opportunities. Di¤erent …rms, even those with the same productivity, typically o¤er di¤erent contracts. Equilibrium …nds workers never quit from higher productivity …rms to lower productivity …rms, but turnover is ine¢ ciently low as employees with large tenures at low productivity …rms may reject job o¤ers from more productive …rms. A worker who quits to a more productive …rm may take a wage cut in anticipation of better wage promotion prospects. Wages within a …rm might also increase by a discrete amount at the end of an initial “probationary”spell. Keywords: wage/tenure contracts, on-the-job search, heterogeneous …rms