Labor Market Informational Externalities and Strategic Complementarities among Firms and Workers

A model of the adverse selection in the second hand labor market is presented. In contrast to the previous literature, we consider the case where the firms are short side and all expected match surplus is taken by the firms. Since the expected level of competence in the second hand market is lower than that of original workers, the firms have an incentive to keep their original workers. For this purpose, the firms may offer them a high wage in advance to prevent them from quitting. However, since the low average quitting rate of the economy results in the low expected competence in the second hand market, it makes the firms\u27 incentive higher to keep the workers inside the firms. These strategic complementarities among the firms may lead to the multiple equilibria of labor market. In contrast to the previous literature, the equilibrium with a low turn over rates allows the higher wages for the original workers inside firms