Implicit Labor Contracts to Explain Turnover.

Abstract

Aggregate data exhibit procyclical movement in the rate of turnover. However, existing models of turnover have been unable to explain this phenomenon. In this model the author generates turnover as an outcome of a second-best wage contract when there is asymmetry of information about workers' mobility costs. A wage contract that insures the "bad" ("unlucky") workers results in "good" ("lucky") workers earning less than their marginal productivity. Therefore, good workers with low mobility costs leave the firm for the spot market wage. This, combined with an aggregate shock, results in a procyclical rate of turnover. Copyright 1986 by University of Chicago Press.