Hiring Policies, Labor Market Institutions, and Labor Market Flows

Abstract

We develop a matching model to account for the fact that worker turnover in Europe is much less than in the United States, whereas job turnover is roughly the same. The model assumes that the quality of worker‐firm matches is both an inspection good and an experience good. Both parties have limited information at the time of meeting about the match’s quality, which is completely revealed only by engaging in production. Hiring practices play a key allocational role in this economy. We show how labor policies distort hiring practices and assess the consequences for labor market dynamics and welfare.