Job Matching and the Theory of Turnover Boyan Jovanovic The Journal of Political Economy, Vol. 87, No.

5, Part 1. (Oct., 1979), pp. 972-990.

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Job Matching and the Theory of Turnover

Boyan Jovanovic
Hul( Lnhorctlorzr.~,I n r . , nnd Collrrnh~c~' u i z * ~ ~ . ~ i t ) . b

A long-run equilibriurri theory of turnover is presertted and is regular-ities t1i;tr have l~erll oktser-ved shoivrr t o esplaiu thc irnporta~lt by empirical investigators. r\ \\,or-her'sprocluctivit) in ;I p;il.ticulnr jot) is 11ot krio\tri ex ante anti Itec-ornes kllo~vnniitre prccisrly its the worker-'s ,job tenut-e irlcl-east.9. 'l'ul-no\er is genel-ated I)) the esistence oi' ;I noildegerierate distr-ib~ttion tlic wor-her's produc-tii~it~ of' across different jobs. The noxit1ege1lerac.yis caused by the ass~rrrred \a]-i;itioriin the cluality of the svor-ker-e~nplovertliatch.

?'he objective of this paper is to construct and to interpret a model of pcrn-~anent separations. A permanent job separation involves a job change of employers for the worker. 7 1 - e ~ ~ ~ p o rseparatiolis (conary sisting rnairlly of temporary layoffs) have been the sul-,ject of recent theoretical work by Baily (1974), Azariadis (1975), and Feldstein (1976), anti are not corlsidered here. Recent evidence or] labor turnover falls into two categories: the cr.oss-sectional industry studies (Stoikov and Rarnon 1968: Kur-ton and Parker 1969; Pencavel 1970; Parsons 1972; 'Telser 1972), a n d the more recent studies using longitudinal data on individuals (Rartel 1975; Rartel and Borjas 1976; E'reernan 1976; Jovanovic and Mincer 1078). T h e strongest and most c:onsistent finding of all these studies is a negative relationship between quits and layoffs o n the o n e hand, and job tenure o n the other. 'This finding is equally strong for quits as it is for layoffs. Jovanovic and Mincer (1978) find that roughly oneThis is a shortened versiorr of n ~ y Ph.1). thesis. I jvo~ildlike t o thank R. E, 1-ucas for eiicorir-,igerncr~r and advice suggesting this problem ro me ancl foi- his co~~starit of thl-oughout the prepararior~ this work, 1 would also like to thank Gary Beckel- arid Lcster I'elser for their help at various stages of the pr-eparaticin o f thc thesis.
[[rifrrrini

<$Polrlrcai Econo,ni, 19iY. v o l . 8 7 , no. 5 , pr I ] 1979 by Thr Univeisr~yof Chrrago. 0022-SROX/i9!R751-0004$01..5l

JOB MATCHING A N D TURNOVER

973

half of this negative relationship is explainecl by the negative structural dependence of the separation probability o n job ter1ur.e. T h e rest of the observed clependence is only apparent anct is caused b y the fact that within any nonhomogeneous gr-oup a negative col~relation between job tenure anti the separation probability will exist, simply because those people with a lower propensity to change jobs will tend to have longer job tenure and vice versa. Other observed 1.e1ationships are as fbllows: women, young nrorkers, productioii workers. those with less schooling. and those in the private sector tend t o turn over more, as d o those workers not cover-eci by a pension plan atit1 those ~ v h ovork in industries with loxver conce~itratioriratios ox- with snlaller c average firm size. None of these relationships is nearly as strong as that bct~veen job te~iur-e and sep;~t-ationpl-obabilities. Existing ~nodels iurnovel- (that is the "pel-manent separations" of' component of turnover) all involve irnperkct information. Net\. infhrnration arrives either about one's current match o r about a possitde alternative match that leads to a job change. In fact, a natural distinction among the rnodels call he made along these lines. In one c;itcgory are models in which turnovet- occurs as a result of tlie arrival of infor-mation about tlie current job match, and the present moctel f,tlls into this category, as d o the ~nodels Viscusi (1976), M'ilde (I%$), of and J o l ~ n s o n (1978).' These are niodels i t 1 which :I job is a n "experience good" in the tcl-minology of Nelson (1970); that is. the only \v;iy to determine the quality of' a par~icular rnatcll is to fi)rni the match and "experience it.'' I11 the second category are "pure search-gooct" tnocfels of job change (Kuratani 1973; 1,ucas and PI-escott 1974; Rurdett 1977; Jovano1-ic 19780; Mortensen 1978: \l.'ilde 1978). In those motlelc, jobs are pure sear-ch goods and matches dissolve because of the an-ivnl of new information about a n alternative pl.ospective match. Hil-shleifer (1973) introduces the inol-e appropriate designation "inspection goods." Iti~b~c-tion ev;llu;ition that car1 take place is prior to purctiase, r.~pur.irncu only after purchase. In this paper, a,job match is treated ;ts a pure experience goort. T h e paper. makes two separate contributions. First, it is the only explicitly ec1uilib1-iun~ treatment of tur-nover in its category. An ecjuilibriu~n wage contract is provect to exist itrid a particular wage cotitr;ict is demonstrated to be an equilibriunl one. This particular wage co11tract has he propert) that at each nioment i t 1 time tlie \ro~.ker- paitf is his ~narginal I ' O ~ L conditional upon all the :t\.ailal,le inf0rnlation at ~ I C ~ that time. Second, the c11;tracterization of the inodel's implications I-egarding

' 1 bec.;~niraw;cre of the \\ark o f thew three author..; aftcl- tllc present \v\.c~tk\\.as l a r g c l ~li~lishctl.

974

JOURNAL OF POLITICAL ECONOMY

the tenure-turnover relationship arlcl the tenure-wage relationship is more esplicit than that of earlier models, and the predictions are largely consistent I$-it11 evidence. T h e rnodel predicts that worker-s the . rernain on ,jobs in whicl-1 their productivity is reve;~ledto be relatively high and that the!. select themselves out of jobs in ivhich their productivity is I-evealecl to be low. Since wages always eclual expected mai-ginal prodi~cts all \vorker-s, the nod el generates (011 average) for M.age gl-owth as tenure increases. Since .job tenure and lahor market expel-iet~ceare corr-elateel across workers, this also implies wage g r o ~ ~ over the life cycle. T h e model also pi-edicts that each !corker's th separation probability is ;I clec:~-easingf i ~ ~ l c t i oof' his ,job tenure. n I.oosely speaking, this is 1)ecausc a mismatch betiveen a \t.orker and his employer is likely to he detected early on rattler than late. T h e learriirlg mechariisrn is such that longel- job tellure has a negative structu~aleffect on tile \vorker's sepai.ation probability. After correcting till- the regression hias that arises bec;ruse of the spurious correlation between job tenure and the separation probability in a hetcrogcneous group of workers, Jovanovic a n d llincer (1978) find tliat this structui-al tiepe1ldenc.e is very strong. Befor-e (leveloping the model we summarize the major assumptions of the ,jot)-matching approach t o turnover.. E'i1.s~ is assumetl that for it each worker a nondegerier-ate distribution of productivities exists across different ,jobs. T h e same is true Lhr. thc employer-~vorkers d i f k r in their productivities in a given task that the ernployel- needs to have performed. T h e problenl is one of optirnallp assigning ~vorkers to ,jobs. T h e second assumption is that employers c;tn contract \vith workers on an iildiviclual basis. T h e employel- is then able to re\v;irti a ivorker with \vho~nhe matches well by paying the \corker r.elatively more. th;it PI-ovictes 111dividtt:tI contracting creates a structure of re~vai-ds p r o p e ~ signals fbr the attainment of optimal rn:itches. !In extreme . exa~ripleof individual coritr;~ctingis a piece-rate ivage scale. A less extreme and a widely prevalent esanlple is ;i s)stenl of pr-ornotion o r dela)-eci pay increases based on the quality of the woi-ker's perfi)l-Itlance on the ,jol, ovel- a past period of time of sorrle given length. These are examples \vtlere workers' pay is c o r ~ t i n g e ~ ~ ttheir- peron forni;~nce. 'I'he third major assumption of the ,job-matching approach is that imperfect information exists o n both sides of' the rnarket about the exact location ~f one's optirnal iissignn~erlt.Follo~vi~rg initial asan rm sig~~rrient, v inforrn~itionlteco~nes availal,le, a n d I-eassignnient becomes optirnal in certain cases. T h e job-matching model ger-rer.ates turnover. as the phenomenou of optiinal reassigrt~nentcztused 11)- the accumulation of ttette~. iiiforn~ationwith the passage of time.
-,

JOB M A T C H I N G A N D T U K N O V E R

975

The Model
Assume that firms' production functions exhibit constarit returns to Cnder conipetiscale and that labor is the only factor of prod~~ctiori. tive conditiorls, the size of firm is tllen intieterminate. Each worker's output is assumecl to be obser\,ed instantaneously by the worker and by the ernployet- so that infbrmational asymmetries d o not arise. Let S ( t ) be the contribution by a worker to the total output of' the firni over- a period of length t , and let

(1) where p and cr a l e constants and a > 0, and where z(t) is a standal-d normal \.rtriable with meall 7ero and variance t (a stanclartl Wiener process with indepentient iricrernerits so that cov lz(t), z(t')] = nrin [t, If]).h e n X(t) is nor-n~ally T distrib~ttecl with mean y arid ~ . i t h t variance C T ' ) ~Assun~e . that (T is the same lor each firm-worker rnatch while in general p cliffel-s across matches. T h e interpretation of p is not one of I\-1-ker- ability but a nieasure of the cjuality of the match. When the ~rratclris forrned, p is unknown. As the nratch continues, further intormation (in the f i ~ r nof' output as given by eq. [ I ] ) is generated. A i "gootl match" is one possessing a large p. Let p he nornlally distributed XI-ctss matches, with niean m ant1 with variance J , and assurne that job dianging involves drawing a new value of p from this distl-ihution and the successive drawings are independent. ?'he latter assu~nptionguarantees that the worker's prior history is of' no relevance iri assessing his p on a newly formed match. T h e only way to learn about p is to observe the worker on the,jol>for a period of time. I'his inclependeuce assunlption also means that the i~iforrnatiorlal capital thus generated is con~pletely nratch specific and is analogous to the conrept of firm-specific human capital.' For a worker with ,job tenure t and cumulative output X(t) = x the above assumptions irnply that the available information on p on his current job can be characterized by a posterior distribution that is norriial (see Chel-noff 1968, p. 266) with
t

X(t\

= pt

+ m(t)

(for each

> 0)

posterior mean

E,.,,(p) = (wzs-'
=
(.?-I

posterior v;~riarice S i t ) =

+ xa-')(s-' + t a - ~ ~ ) - ' (2) + tcr-')-'.

.l'lie pair- [X(t),t ] is thu-efi~re sufficient statistic for the information a co~ttainect the entire posterior distribution. ('Ihis property is essenin tially due to the independent increments property of the Wiener
''1.0 elaborate: Cl'hcn tlealing wit11 rarrtion~variables the corlcept of inforrrration spccificit) is associatet! with the conccpt o f i~ltlependcnce while perfect informational generalits is associatecl wit11 perfect correlation.

976

JOURNAL 01: POLITICAL. ECONOhlY

process.) Furthermore, Il:.Y(ttt ( p ) is 110r1na11y distributed with mean m :irid variance .\ - S ( t ) ((:her-noff 1968). Firms are assumed to be risk neutral and to nlaxirnize the rnatliematical expectation of revenues discounted by the rate of interest. r. The): cornpete tbr workers by offering wage contracts. In a long-~-un equilibrium the payments practices of each firm ~ ~ ~ obe lwell underu d stood and would not need to be explicitly written. An implicit contract equilibrium is studied here. T h e present model al~stractsentir-el) from the cctnsideration of' shocks stemming f'rom the product market. A11 firms face the same product price. uorrnalized at unity, so that a mairitaineti h!-pothesis of' the model is that demand conctitiorls are stationary. Assume that the firm's wage policy can be characterized by a wage function u l [ X ( t ) ,t ] . -Phis is the wage paid to the I\-orker with tenure t if' his cumulative output contrihution is ecjual to X(t), If the firm tvishes to fire a certain worker, rather than doing so directly the firm is assumed to lo~ver wage by an arnount sufficient to itrctuce his 41 him tct quit. , 1 the job separations are therefore at the .rvor-ker's initiatke, but since sorne of the separations are disguised layoffs their empir-ical counterpart is really total separations (quits p l ~ i s layoffs). ?Yorkers are assumed to live for-ever," ancl this assumption justifies the exrlusio~i age as an explicit. argument from the wage function. of As long as he remains with the firm, the ~vorkerreceives payment according to tlie wage functiorl w ( . ) . H e has the option of' quitting at any time. L.et Q be the present value of' quitting a job and then pursuing the best a1ternatix.e. T h e infinite horimn, constant discourit rate, and the independence of'the successive drawings o f p imply that Q is a constant.' 1,et a(Q.[ic!]) the present value to the worker of be ohtainilig a job with a finn which offers ) ;IS its \\.age contr;ict and when the value of quitting is Q. Then ifc represents tIre direct ancl the foregone earnings costs of job changing,

T h e constant c is assunled to be parametrically given for each \vorker, although i t may vary ;icross workers. Let T he the quitting tirne and let H(x,t [w],Q) = prob ( X [ t ]s x and 7' > f given [a!]nd Q) and F(t [ u ~ ] , a (2) = prob (7' G t given [as] and Q). I'hen F is the probability that the 15,orker quits befi>re tenure t , while N is the probability that he does not quit before tenure I , a n d that by that time his cu~nulative output

utrrl implvitry: the ;tt)srtice of aging+)nc. \\trultl not r~litke diff'cr~tlt ledic-tion ,ihouc rl p liveti d l o r ~ girr~c i th;~nfor a the Irt~gth tlw t.rtn;iining litc of a \\or-ket-tvho has ;iIrc,~dv of w o r k e r w h o tias onI\ li\ztl ;t shor-I tirne. 4 ' 1 he c-oristarlc-\ o f Q over tit~lrtnr:;r~-rs that (lie war-ker never returns to a jot) from W ~vhic he once separarect. 111other- \vo~.tls. i t esistetl, the optiori of I-cc;~ll O L I I ~ rrever. h if

:' klorc gcrierall), otie c.oulil ;rsstlrnc. thaf \\.orlers' lifetinres arc csponc~nti,+ll\tlistrib-

be exrrcisrd b\ ttle wet-kcr .

.JOB M A T C H I N G A N D T U R N O V E R

977

doe4 not exceecl x. I'hen define the appropnate ctens~ties ( r ,t [ u l ] ,Q ) h and f ( t [zo], Q) b) h = d N I d v a n d j = dFldt Both f and h are chosen b~ the ~voi In respon5e to a wage function X I ( . ) and ,I p ~ e s e n value of kei t quitting Q. -1 hen

Equ;ition (4) holds at the optimall?. chosen f~inctions and f . Since f h integrates to a number not exceeding unity, aa/aQ = S;,pir'fi1t < 1 . Then it is easi1)-seen that for given functions h , f', and zu, equations (3) and (4) possess exactly one solution for the pair of' scalars (a, (2). All new workers look alike to the firm, and each ~vorker offered is the same wage cor~tract.~ differential form, equation (1) reads d X i t ) In = pdt + cdz(t). Letting E,,, be the mathematical expectation operation conditional on X(t) = x at t , the disco~~nteci revenue from the output = of a single worker is ~ f : p - " d ~ ( t ) = E f Te-vfl;v,,,fd~(t) EfreF'" E,,,,,(p)dl + E f Tu -'.'~E~,,,,di(t). stochastic integrals are It6 inte'l'he grals (see fiushner [1971] for their definition) anct the last integral is therefore zero, b y the indepenclent increments property of the = ~ f ~ ~ ' - ~ ~ ~f;crt ~ ~ ( = ~ ( ~ Wiener process, so that Ef:e-'$ix(t) f z_E,.,(p)hix,t [XI], )dxrlt = P(Y, [il.~]). Firnis are aware of the workQ er's optiinal quitting response to the wage contract {zu), and this is reflected in the above equation. Now let n(Q, fur)) be the discounted expected net revenue from the employment of a given worker who is offerect the contract { u i ) and who has a present value of quitting equal to Q. Then

where y = ~ f T a - ~t y[ul], ) d t . ( Q In maximizing n(Q, [ X I ] ) over functions [ w ] , the film treats Q as gihen, since Q is determined by the wage policies of other firms.

3 Let 1 be the set of competitive equilibrium wage contracts, and for an, 7 ~ ( .let Q([ro]) denote the unique solution for Q from equation ) (3). ''hen, if us(.) E B , (E 1) each worker fc>llo.clr., optimal quitting his

' Sirnilarl), all f i r - l r i \ look alike to the worket- ex ante. Straightf'ortvarii estensions of the nod el t o the case where there art. observable differences in characteristics anlong workers are outlined at the enti of the paper. Salop (1973) takes u p the search problem when the fcorher is able to distil~guish among firnrs ex ante arld has partial inful-niatioti riot only about the wage offerrd by the firm hut also about the likelihootl that he will receive an emplovmeiit offrl- Yrotn the firrn in the event that he saniples it. 1x1 Salop's analssis the most attractive opportunities are saniplect first, arid the job seehet- lowers opportunities Iris acceptance wage with his iiuration of unernplo~rnentas his ~retnair~ing \\~OrSCrl.

Y ?a

JOURNAL OF POLITICAL ECONOMY

poll~vin lesponw to zu(.) anti to Q([w]); (E2) T{Q([zL~I), [zL*]) 3 n-{Q([IP]),[GI) for all in(.) 1 711 (. ), so that ZLI(.maximizes expected ) profits; (E3) n-{Q([w]),[ul]) = 0 (zero expected profit ~ortstraint). Let =, t o r 1 ( t ) I hi\ \+,\.,ige contlact stntes tl-l,it the ~ o r k e l \\111 be paid hls eupecter-i (1n,11 glrlnl) p~octrlc .it each rnomerlt 111 ttrne. t 1x1Qv =Q([itx4]). ?hro?~~n I -70X ER Ploof -E:S I \ tiearl\ sat15fled b> 711" 1 o plole E,1 anti E2. \ilppo\e t x ( o n t r a d ~ t t l o ~ ~ F2 1 ttot \,ltlshed b\ w v 40 th,it t h e ~ e\ilst\ sorne that s c 711 E H such that a d e ~ l a n t t r m offers ~t f
1 , )

while the .ilo~ must be tfolng at least a\ tvcll '1s uncle1 kel

711":

(The value of'quittirlg the deviant firm is unchanged at Q*.) From (5),

?'hen equations (6) ;illri (7) imply that the left-hand side of (8) is strictly positive. But the right-hand side of' (8) is equal to JTe rlJ",w* , (x,t){h(~,t[itl],Q*) - h ( ~ , t [w*], Q*))d~dt+ Q*J;p-"~f(t [ i ~ ]Q*) /'(t 11711], p ) > c l t , and this expression cannot be positive since the quitting policb implied by { h ( . ~t . [ a i * ] , (I*), j ( t Q*)) is optimal fhr the workers when facet1 with the wage contract ~L!*(Y, anti the t) present value of' quitting Q*. Q.E.D. Since workers and firrrls are risk neutral, ul*(x, f ) is rlot a unique equilibrium contract. any random variable [ possessing the property I?,,([) = u!*(x,t) would also qualify. A pure piece-rate wage involving a payment ofX(i + At) - X(t) over the interval ( t , t + At) theretbl-c also qualifies as eqttilihriurri since E,.,ldX(t)= ~L,"(.Y,t + crE,,clz(t) = ilr*(x, /)d t ) t i t . Ally such contract leads to idetitical turnover behavior as under ZL~*(X, t ) . Ever1 within the class o f functiorls o f s and t alone, u,*(x.t) may not be unique. ?'he following theorern guarantees, however, that tul-nover behaviol- is unique. ~ ' ~ P O T P 2.-If W~ 71, E H the11h { x , t [n*], Q([i/l])) = h { ~ t, 1 [ill*], Q([uI*])}, and j { t / [~LI],[ ~ L ' ] ) ) = J'{f 1 [711], Q([af*])). Q( Proof'.-See Jovanovic 19780. T h e proof' is lengthy and rlot particularl), instructive. Theoren, 2 states that the separation policy of the worker is unique even though the wage contract leading to it is not. This turnover behavior is identical with that which results in a situat tion irl which each firm offers a wage corttract zom(x, ) = E,,(p). Purc.to optirnnlity rft~irri'ozlrr.-Sint:e all the agents are risk tleutl-al, the

[ z r l * ] ,

JOB MAI'CHING A N D TURNOVER

979

correct optirnality cr-iter-ion is the maximization of the discounted expectation of' aggregate output. Theorem 2 inlplies that whatever the prevailing equilibrium wage contract, the worker behaves so as to maximize his own expected discounted output. He collects all of the rent associateti with the match, arld the decision about \\-tlether or- not to terminate the match rests with hirn (although the tirni is equally involveti in the sepal-ation decision since i t lowers the worker's wage to the point where it knows the worker will quit). Therefore, a separation occur-s if and only if' the rent associated with the match falls to rero. A central planner could improve on this situation onlv if he krielv zcjhich workers and it~hirhfirms would make good matches. Assume that the worker is faced with the wage contract zir*(x, t ) = E,,(p) and a present value of quitting Q. T h e sufficient statistics (state variables) areX(t) and t . It is more convenient to use instead w ( t ) and t as the t w o state variables, where ul(t) = EX,,,,(p). Since ~ ( t is normally ) tlistributed with mean 7n i-tnd variance .r - S ( t ) for all t , it satisfies the stochastic differential equation

so that the worker's wage folIows a driftless random process with ever-decreasing incremental variance that tends to zero as tenure tends to infinity. Let V ( w ,t) be the ("current") value of the game to the = worker rvho has tenure t and wage ~ ~ ( twj . Then letting E,rt denote the nlathernatical expectation operator conditioned upon z and t , 6 c
~'(ZU,

t ) = i ~ l A t P - ' ~ ' E , ~ Y + At], t ) (~~t[t

+ o(At).

(10)

Subtracting \'(XI, t ) from both sides, dividing through by At, taking the limit as At tends to 7er0, and applying ItO's Lemma (5ee Kushner 197 i ) j ieIdc

As with most optimal stopping problems involving Mai-kov processes, the space of points ( w , t ) can be divided into a continuation region and a stopping region (see Shiryaev 1973). The continuation regiori consists of those wage-tenure cornbinations at which it is optimal for the worker to remain with tllc firm. E;quatioris (10) and (1 1) hold for all
" ( ) ( S t ) epresertts ttarlns rentling to zero f'aster than At does. Note that the optiort of r stopping o 1 ( t . t + At) (in wtlich casc a rcwartl Q is rollectecl) is exercised wirh a r prob;ibilitr. that hehaves esser~tiall\ as does

;I
I

- '\

1-q

(At)' -

<v 5 z CXP

(At)' "

1-

;1

*(At), 2

1
1

()(At)

(see Feller I!)6t5. p 171!, xvhrr-e thc. inec1ualitv follows by a ~vell-knowt~ result o n the hlill's I-atio atitl whel-r s is eclnal to 11' - @ ( I ) .

980

JOURNAL OF POLITICAL ECONOMY

wage-tenure combinations that belong to the continuation region. Let [O(t), t] be the boundary of the continuation region so that along the boundary V[O(t), t] = Q, and O(t) may be thought of as the reservation wage at which the worker quits the firm. Evaluating equation (1 1 ) at = O(t), O ( t ) = rQ - [s(1)~!2~r~]l',,,.[e(t), V,[e(t), I]. A welI-kno.ilm t] "smooth-fit" condition of optimal stopping (see Shiryaev 1973) states that along the boundary: V,[O(t), t ] = aQ!at = 0 , implying that

0)' $ ( t ) = rQ - -V,,.,

2aZ

[$it),

t].

In the interior of the continuation region V(u8, t ) > Q. Since at the reservation wage V[O(t),t] = Q: and since V,,.[O(t),t] = 0, this implies that V,,,,.[O(t), t] 3 0. Note that S ( t ) declines monotonically to zero which suggests that H(t) should be rnonotonically increasing u p to rQ. It is possible to prove [see the Appendix) that H(t) < rQ for all t , that (IOldt 3 0, and that !im O(t) = rQ so that the reservation wage increases u p to its limit froni below. T h e reason fhr the increase in the reservation wage is the decrease of the incremental variance of the wage process as tenure increases. A large incremental variance implies a large dispersion in possible future wages. If wages turn out to be very high the worker does not quit. If they become very low, the worker partially avoids this adverse outcorne by quitting attd collecting Q. In the absence of the opportunity to quit, the risk-neutral t\.orker's welfare would be unaffected by changes in the incremental variance. T h e limit of the reservation wage is rQ. This is because the wage tends to a constant as t tends to infinity. T h e r e is nothing further- to be learned, and at the point of indifference between staying and quitting the capitalized value of this constant .tr,age must be equal to the present value of quitting, Q. T o obtain an approximation to the probability of job separation by tenure, set H(t) = rQ for all t . Then for this approxinlation to the reservation wage?

' A n infbrnral proclf is as fbllo~vs: ( W ,1 ) = Q + ji',,V,.fv. /)rlv is rnaxinrircd with V respect to @(/) (the reservatiotl wage at t ) . Therefore dtfferentiating both sicies with one I-espectto @(/),setting the result equal to zero, anti taking thc limit as uptends to @(0, t, obtains that V',.[@(t), t ] = 0, which in turn implies V , [ @ ( t /)I, = 0 since V [ % ( t ) i = (2 = constant. In the Appendix it is shown that B ( t ) < rQ for all t , implying that V,,.. > 0 along the , ' boundar-y. where it is also true that .E = 0. So, if it was true that the continuation region was boundeci from above, this would imply that V < Q for some point in the interior of the continuation region suf'ficiently close to the boundary, which cannot be true. Therefore, H(t) is single valued and it bounds the continuation region from below so that the optimal policy does hale the reservation wage property. This is not surprising since it is known (Rothchild 1974, p. 7 0 9 ) that optimal search rules from normal distributions with unknown mearls and known variance have the reservation price property when the prior distribution is also normal. ' T h e wage is a standard Wiener process in the s - S ( t ) scale (see the discussion

JOB MATCHING A N D TURNOVER

where iY(s) = ( ~ T ) - " ? S & " ~ dz iwhere p(t) = s - S ( t ) is the precision. 'l'he unique mode of this distribution is (171 - 7.0,)" After the mode, the prohal,ility of turnovei- ciecliries rapidly to zero. Sonle ivorkers never change jobs, since lim F(t . ) < 1. r+= 1.0 detel-mine thi- p! eciicted behavior of' the separation probability by tenure: consider the hazard rate, 4(t)-f!(l - F). Then + ( t ) is the density of separation conditional upon an attained level of tenure, t . The rnodel predicts ;I nonrnonotollic relationship: first [4'(t)] > 0 and then 4'(t) < 0 as t gets relatively large. That $ ( t ) must eventually decline fi>llowssince I--, limf(t) = 0, while 1 - F(t) is bounded away from zero. T h e precise inarheliiatical expression hl-the tenure level t X at which 4'(t) changes sign and finally becomes negative cannot be > 0 clearly t* 2 m obtained in closed form, but sincef' > 0 implies - rQ = the model off. If the mode off is close to zero, 4 ' ( t )s likely to i become riegative early on, as appears to he the case empirically (see Jovanovic and Mincer 1978). T h e tenure-wage profile (defined as the conditional expectation of the wage given that the worker has attained tenure t ) may also he calculatedl"and is equal to 6 ( t ) = (?n + (nr - ~ - Q ) % ~ ' ( - N [ s- S(t)]-""11 - 212'{-n[s - S ( t ) ] ' ! ' ) ) , Note that GI([) increases nionotonically from ~ I I when tenure is zero up to [ m + ( m - rQ)'LS(-crs-'I" )!l - 2:Y(-(r,\C's2)] when tenure tends to i~lfiriity.Therefore, as low-wage workers quit arid high-wage workers stay, the model iniplies that the average wage of a coho^-t of workers increases with tenure, eventually at a decreasing rate. In the limit, as tenure becomes indefinitely large, the average wage of those members of the cohort who have not quit approaches a constant as the wage of each worker becomes constant and equal to his true productivity. .I'his then is an alternatike explanation for -ivage g r t ~ o t ho n the ,joi,.

+'

preceriirig eq. 191). Therefore the fhrmula represents the first passage probability for a Wiener p t - t ~ e s through a linear I,ottndar) (Cox and Miller- 1965, p. 221). r '" 'l'he prolmhility that a Wiener process will rlot c-ross a linear hotindary by a partic-uiar time and that it will etrd u p at a particular value at ttiitt time is also aiailable in closeti form (see Cox and Lfiller 1965, p. 221, eq. 71). .4f'ter appt-opriate adjustment the conditional density of M-ages b y tertur-e le\.el) is obtained. atid ri.(l) is the rr~athemarical ( expectation of this distt-ibution,

982

JOLTRNAL OF POLITICAI. ECONOMY

A mismatch leads to a lobver \rage and an early separation. 7'hus, holding constant market experience, average past earnings are likely to be lo~ver a worker ivho has experienced many job separations." tor 'This prediction appeii1-s to be consistent ~vithevidencc from the National l.ongitudinal Stud); (NI-S) mature men's sarnple (see Bal-tel arid Borjas 1976). Job durations over the life cycle itre identically and independerltly distributed ~.andoni vitriahles. 'The turnover generated 1)); the model therefore fi)~-ms pure renebval process (see Feller- 1966, chap. 11). a Let y denote the ivorker's labor market experience and 1 1(3') + o ( A J ) denote the pl-oljability that the worker experiences a job separation o n the market experience interval (. , .u y A y ) . -1'hen R ( J )is the renewal (lensit!, whictt satisfies the equation

Jovanovic and Sfincer (1978) prove that a monotorrically declining $ ( t ) irnplies a rrlonotonicall): cleclining K (J). I n other isorcis, a monotonically declining separatior~ pr-obattility hy tenure isI)j itvclf'sufficicnt to cause turnover t o tieclinc monotonic;~llyove1. the life cycle.I2 Last, the model ge~ier;~lizes stl-aightfol-avaiicily t o incorpor;tte pel.miinent cliffel-ences in rvor-kcrs' cfiiiractel~istics such as lewl of schoolitlg, ability, race. sex, ant1 so o n . l ' h e pal-alnetel-s of' the rnotiel (S, 771, a" J . ) can then be 1.egal-der1as fi~nctions these ~ariahles, of with each distinct group of \vat-kers treated as though they belonged to a distinct lnarkct of' \vorke~-s f that type. T h e entire ;tiialysis I-emains valiti co o long as infi)rmational synirnetr\- l,et~veen wol.ker.s and ernplo?ers is rnaintainetl, so that issues of sigr~aling artrl self-selection are sidestepped. '1-he riatul-e of' the assurrietl f'unctional deperitlencc bet~vecn w, t - , r n , and $ on the one hanti, anti the \vot.kers' persorl;tl character-is, tics o r 1 thc other, will dr:terminc the preclicted relationships het\vcer~ turnover and these personal charactel-istics. This is not pursuer1 here, hut is a11 ir~ter.esiingprobleln fi)r future research.

" Holding evcr)thing else c.onst,lrtt. This statentrtlt shoulti ilot I,e inter-pretcti ;is s;r\ing t1i:lt \vithir~ group ol'obsc~.\,ition:iIl). ;I t-qui\;tletit prople t l ~ o that have changed e jot~soften in tlic p;i.;t hate had lv\\.cr.a\rt.age past r,irt~ing\ th;in those rhai h,i\t. not changed ,jobs often. I n other wortis, the rnotiel does [tot inrpl! rllat "tnovers" st~ould do \$or-sethan "\t;t\rrs" c3veit though ernpit-ic.,11ly thi\ ;ippe;tt-s t o be trut.. " A sirnil;rt- rrlaiionship holtfc fhr wage: 1.t.t I.(.;) he thr rrtarhcr~t:~tical c.rpec-tation of' the wagc ;II a giben level of lahoi- ni;ir-krt expc.r.irtice J . I'hert I.(\.) s;iti\fies the equ;ition L(Y\.) i > ( j ) i l - I . ' ( , Y ) ~+ [ ~ : / ( O L ( - tjdt. I':ci. (13) & kr~o\rtt;is the retiew;il ecluation = ~ which, fbr- all! giveti continuocis tlcr~sit! I ( / ) , possessea a utticlue solurion K ( J ) (Feller 1966) sucft that K ( 0 ) = f (0) ailti lim Ii(\.) (0d!ir1.
0-'i

=[I;//

JOB hlATCHING A N D TLTRNOVEK

gH3

Appendix
now pro\-<,the asser.tiol~s niadr in the text following equation ( 1 2 ) ahout @ ( I ) , bourlci;~~-) the optinlal contirtuatiori region. We pr-ove that H ( t ) < 1-Q the of tbl. all I , that @ ( I ) is r~ontlecre;~sirig. that i t approaches t-Q as t tends to and irifinity. Sorric transfol.rrl;itior~s the original problcrri \\ere rlccessary before of these ;~ssc.r.tions co~tl(l proved, anti since tllese tr;insforrnatic,rls move orle Ilc a\t.;t\ fr.orn rhct ecor~omicsof the prot,lerri, it seenied prefer.al)le to incliitle these proofs ill t hc ;\pper~diu. Suppose {hat a probahilit\. space (0,F'. P) is giverr, with w heirig the F functionf ( w ) , the elenier~tary everits (wE0;t). or any real-valued F-n~e;isurable rri;ttherrlatical expc.ct;itiori operator E is tlefir~etias E V ( w ) ] = J j ( w ) d P . Let S ( t ) E K 1be a hIarkov process cletincd o n the above space. A particular sample path of' the process is written as [ X ( t , o ) ] : T f . Let E,, he the expectation oper,trcx cortdrt~on,rlupon Y ( 1 ) = \ ( on5ltler the follot~ rng pr ohlenr of optir~i,lll\ stopplng t ( t ) Lcr '1 utrlrt\ ti fi~rlctror~( \ ) I>e g i ~ c r \the11 u ( \ ) deliotes the Irr\rnnt<lneous p,i\oft to the ~, 111.1\c.r at trnw 1 ~f the p~irrrc~ st111 111 progless ~ 1 tt a~rct f \ ( 1 ) = 1. Let Cr (1) be 1s r 13 the rc.1 rr1111,rl p,~\offfurrct~olicler~otingthe utrllt\ to the plarer if the g~lrne stopped c\,lctl\ at I ,rritl S ( I ) = \ I he player's otqectl\e 1s to rnn\lrrirle h ~ s \ q h ~rt e\pectt,cl tlrscourrtcd i ~ t ~ l r tfrorir pla\ ~ n rlre garrre ( ~ t ~) t= 11it. t l ~ s c o ~ llate)
LVtx

over- F-rrleasural~lrstopping tirrle functions 7'(w). X flirther restl-icrior~or1 T ( w ) is that it must not anticipate the future. A rigorous discussion of this ~.c.quir-enrent ;ippears in S1tirv;iev (1973). For rnost stoppirrg problems, itrtd cert;linl\. fill. the problems discussed hclo\v. this reqitireirlent niearis that thc solutiorl to the optinral stoppiirg problerrl car1 bc charac terizeci by a co~itiiiu;itiori regiorl for thc pr-ocr:>sX(1) so th;it the first exit tinre fronr the I-egioli is the ~ oy)tirir;il stoppirig tirnc for X ( r ) . L.et C ( n , I ) he the value of t h gaiitt. to the pIa\c.r. ;lt I , corrtlitio~r;iluporr X ( t ) = s. 't'herr

where ?'*(a) is the optinial stopping policy and C ( x . 1 ) is the current value furlction. L.ct

1xt q(\, t )

= (,(L)

L7(\, t ) , for '111 ( 1 , /). ancl let ,/,(\. / ) = ~ ~ ~ ~ - r r 7 * g ~i )~- i l~ * ( ww) ~, , T * ( ~ ) ) , ( t

-

('14)
i A.5)

;~rtd co~~sitler- problem of' irtaxirnizing the F

6,

"'"' g ( Y [ I ( w ) , 01, 7 ( w ) } = I:' g * { X [ T ( a ) ,w ] , 7 ( w ) )

over s~oppirig-tirrlet'urictions 7.(w). I.er f ( w ) be the optirnal policv for rhis pr~ohlerr~. 'llierr the follo~virig tt~eorernt~olds. 7.h~orrm 3.-If E J : I , - ' . ~ul.Y(t, w ) , / I ~ { I < r , then f ( w ) = 7'*(w). a t d ] I

g84

JOURNAL OF POLITICAL ECONOMY

Proof.-Shiryaev 1973, p. 101. Theorern 3 asserts that stopping problenis such as ( A l )which itivo1ve a n instantaneous utility obtainable ~ r h i l e gitrnc the involve ol-rl a is plavetl cart be transfot.med into problenis such as (A.5) ~\.hich trrrninal pa\of'f function g(x, /). Note that C'(r, t ) is the current value of the to policy "never stop the garne no mattel- wh;~th;ippe~-rs X(t)." Let X ( t ) satisfv the stochastic Ith equation

(.A 7 )
(or (1X(t) = ( t [ X ( i )tldt + b [ X ( t ) ,t ] d v ( t )in differential form). H e r e r?(t)is the , stai~tlard\Vierter procrss a r ~ dX ( / ) is ;I l.lat.kov pl-occss j\.ith instantaneous . variarice [ b ( .)I2. nrean n ( . ) and instantaneor~s -1 h e following theoretn cotrtains the basic resulls associ:rted \?it11 thc prohIcni of optirnall! stopping .Y(i) when X ( / ) is tiefined hv ecjuatiorl ( A 7 ) . 7'Jzcot.cnr ?.-Let X ( t ) he itefi~ietlb\ ecjuation ( A ' i ) ,a n d let the stopping 1"-oblem be given 1)y ei1uatio1-r(A5).Let 7 , , -c be given, a t ~ t in atf(litior-1to the < l other requirements o n T ( w ) ,let T ( w j E 10, TI,]for i l l wEIZ. 1,et.J = { ( t , x ) : t E [ O . 7',,l.sER1),arid let V ( x , t )= supE,.&{X[T(w),wj, -/'(w)), where the s u p is tal\eri over the atlrnissahle filnctio~is ( 0 ) .Assume that the firtictiorts c r ( . ) , h ( . ) anti T ((.) a r e :dl t~vice contitluouslv dif'ferential>le in x ant1 once it1 I ,:tnti t1i;tt for all 1 ' ( x . t ) ~ J , i!t!l it,rl+ ~t.,.,~is k t l + + + 111,r,, + + ~ I I , ~ ! & ( I + .Y )" a n d that a, + h, k where ancl k a r e positive (.onstants. 1,etD = [(t,x):V > 51 and A = { ( t , x ) : t t ( . + (z(.)tx(.) ) + (112)[8(.)j2[,,(.) > 0 ) . T h e n the follo.rvirtg pi-opositions holtl: ( 1 ) V 3 ( o n J . (2) I f V is diff'eretltiahle, then Z7,(.) n(.)C',(') ( 1 / 2 ) [ b ( ~ ) ~ V , , (=) 0 for ( t , s ) E ] . ( 3 ) T h e first exit . time of the process L t , X ( t ) ]from D is a n optimal stopping time. Therefin-e L) is the region of the continueti observations. and. along its bourirlary. I,,' = 5. (4) .4 C D. (5) If ,4 is connected, so is I). Proc?f:-Miroshriichenko 1975, p. 387. C;onsider riow the worker's problem. = (p Let ii~*[X(i).t] Ex,,,, ) = IV*(t) be the basic llarkov process defined o n F. P ) . 'The worker rllaxirnizes discou~itectexpected earriings. His instal-itatleous utility is It'*(/),while the tcrrninal p a ~ o f f ftinctiorl is a c.olrst;int, (2. 'I'heref(,re the counterpart o f ccluatiori 011) is

1 /

/ 1

1 . ~ ; ) ' . /~.,,,~l

I((,!

(a,

7'heprocess I.V*(/)has ~ e r drift. 'I'heretorc the courlterpart of' I.'(x, t ) is o E , * , J,P-''s-"w*(.s, w)dc = r-lLl.r*. 7'herefitre. g(x. t ) = Q - r-'lV*. Since E J ~ P - "IV*(t, w ) tit < x , t.heo~ern3 ma) he applieti to the pro1,lenr to I cortclutle tltat the solution t o the worler.'~ prohlenr o f r r ~ a x i n ~ i ~ ithe espr-csrrg sion in ( A 8 ) is itientic;~l~ r i t hthe solution to the problern of' rnasirrri7ing

If T * ( w ) is the o p t i ~ n a l solution, then equation (A6) \.ielcls

wht.rc (:(I\'*, t ) is the worhcr's currellt value function. N o w let Cl'(r) he the stant1;ircl \Viener- process, with I,l.'(O) = 111; 12'":t) is ;I stanti;irtl \\'icner pt.octlss + in t h e \ - S ( t )scale (Chernoff 1968, p. 22ti). L c r t i n g ~ a - S(/) I = rr21(\ V ) -~ - ~ art0 k'*(w) -- \ - S [ ' / ' " ( w ) ] . '1, ~

J O B MATCHING A N D TURNOVER

985

~vhere7'*(w)E[O,m)-+ Y*(w)E[O, .r). ?'he prohlern has therefore been transfortned illto orie of' stopping a stal~tlard \.t:ierler process, M'(J), on the illterval L , s), \kith only a terminal payoff' function O

1 heoren] 4 m,iI no\\ be appllecl to tht\ problem ~ \ r t hI ( . ) = 0, b ( . ) = 1 Lct ( V(iZ. J ) bc the ptesent \ , ~ l ~ funttton for thts prohlenl ticfinetl b~ ie

1'1o~x)~tt10t14 the theorern nssel ts that ,I C I ) hrre I1 15 the contitluatlon of regtot] for the proce\s L Z (I), 1J I.ct [$(I),I ] he [he t)ouritlai\ of the corrttnu,%1' tlon rcglori. I hen [B(?),3) Ff A + 0 )
I

for t lO, 0

(.I15)

-1 he 8 ( > )i i ~ t r eesct\,itiotl \\,lge I? the (It', \ ) \p'i<c Let r \\age in the (bt'. t ) sp.ice 1 hen B(t) = 01, - \([)I.

6it) be the ~ c s e r \ ~ a t i o t ~

r h r o ~ p m5 4 Proof -Along

0 ) < rQ

fo~ )LO, the boundar) ,

5)

l'l@O 1, % I =

).

I.

(:I I ti)

In view of (.415), it is sufficietlt to prove that B(J) # rQ fitr ariyjE[O, s). By contradictiol~, suppose that fitr rotnejO LO,s).f)(jO) Equation (A16) then = r Q. implies chat V[f)(y0), o i = [().(i, = 0. C:onsitier ria\\. thc value of the y s o) yo): follo~-ing polic) ;it ( ~ ( 1 , For some 8 such that y o 6 < \ , continue thc game ~ t r i ~ iol + 8. ?'hen if'71(yo + 8) < 4 2 , stop the galilc at y o + 6, anit collect 5[z1(11" y + & ) , y o + 61 > 0 . If7?(j" + 8) > rQ, cot~till~ie ganir urttilr = 5 , ancl collect a the pi~koff ccliial to zero. But putb I v ( y 0 + 6) < J Q giver] that 71(y0) = r Q ] = 112, allti so there is a positive cxpectcti pavof't'und(;.r this policv. Since this policy is feasible. C'[0(j0),yo] rllust also be positive. This colnpletes the proof of the theorern. Let F(y) be the probability that the \vorkrr-'s optinlal policv will lead hirn tit quit beforej. 17henF(yo) = prob {inf [Ctr(j)- 0 ( ~ ) ] 0). I,etf(y) he the density. O=s,'.y" Then

(A 17)

Let cu ancl , be two par;tmerers. Assun~erllat the evolution of X(t) is not R af'f'ected t q (1 anti @. Let u(.v, t , a ) be the instantar~eousutility firnctiori in present valrrc terms, and let G (x, I , p) be the tel-rninal payoff' function also in present value terms. Let I f ) ( / ;a , p),I ] be the optimally cletermitled bourtciary of the contintration region for tile process IX(t), 11. T h e function O(t, a , P ) is assumed to he sir~gle valuect. Let h(s, 1 , a , p) be the probability (density) that the game will not have been stopped befi~re, and that X(t) = r , and letf(/, a , t

986

JOURNAL OF PO1.ITICAL ECONOhiY

p) 1)r the
t

piob,rb~lrt~ (clen,it\) th,~t ganie it111 be stopped el,ic t l \ n t t It rs the leal th,~t H( ), h t . ) , and f ( ) ,lie In one-to-orlc c o r ~ e $ p o ~ l t l e ~ l t e olle nit11 ~ s , ~ r l o t h e ~ ilroultl be thought of d 5 decrsrori $,$I ~ t b i cLet I be the hort~oi?. ,inti 0 < I -r I ct I ( a , p) be the \<ilucof the g~trr~t.t tlllte relo I her1 : : .~

1 l i r o t ~ n ~ l.117'(~/0po l ~ ( o r ~ t-11) a ,lnd /3 do riot ' i f f t ~ the e~olutron Y (1). 6( 1 n t ot .ind r f I ( ( . ) . (,j ), h ( ), f (.I aild V(.) ~ I cl~fft~ierlt~able l rrespcct to a and 8, C \\~t u,,(\, 1 , cr)h (\, 1. (I P)d\cil 'lnd ((1 ,rip = OVia,8 = tiler, clV;ria = iJV/i)a = f,, f,',(..~e(c,( 2 . p). t . PI/((,CY. p)dt all Proof-Cnless st,~tt~l other~tr\c.,z c ( ), (,(.), A t . ) . f ( ), ,~nci 0( ) e\aiu<~ted ( \ , 1 , a, p) Ful the?rilo~e. ,it sllrce the proof f o ~ I \ ,111trost~ d e n t ~ c a l a \\lth the proof f o ~ oul\ thc l'ltter is p e n p,

1-1

the theol.e111 will have Iteen pi.oveti. Since tht: worket-'s policy i t r r.csporlse to a a r ~ d is optiliial, /3

fol a1101p * 0 Subtldc tlng \'(a. /3) from borh s~cics ( A y l ) , tli\lil~rlg of thlough In (la, auri taLlrig the llrnlt JS d p 0 , the ierult i\
A change i r ~ ilr~plie~,genei.;~l, charrge in the optirrial stopping polic!. But /3 in a the polic\ which lvas optinral prior t o the shift i l l ,8 i.ernains a feasible polic! . 'l'hcreforc

Kcluations ('-123) ,tntl ( A I Y ) ~rnplythat and (121) and (Altf) 1111pl\ that (A20) holds -+ tlV/cl@ = i3Vla@ .ilrd the theor em rs p i o ~ e d I he results of I heoiern f i ale nou used to obt'iin ciualrrati\e 11rfo1 nr'itloii about the t l e ~ ~ ~ , i t l v e \the uorker's cuixcnt \ a l ~ i e u l ~ t l o r ~ ', 1 ) \lnce of f (.(kt IV'*(0) = rn,

JOB MATCHING A N D TURNOVER

BL the envelopr theorem. slntr- [[Ots),\ 1

0.

Since/ ( v ) is a (iensit?, it is rionneg;itivc., \vhilr theor-em 5 implies that &H(Y),J/ > O foryElO,s). Therefore (ac/a.s)(ni,0) > 0. But the state ( m , 0 ) isarbitrarj-. If the state is ( I t - , r ) , wher-e Y = \ - S(/), ar~aloguc. the right-hand side of' the of ec~u~tion (.42.i) n.ou1t-i holtl. r%.ith,\ replac cd b\ S ( 0 . I he onlp \$.a\.in which the r\rol.Ler's \\clf;u-e is af'fecteci b\, the nler-e passage o t time is thl-ough the drcr-case in S ( t ) . Since a(:(iV4:.I)ia.S(i) > 0 ,

I'he envelope tlieor-em cannot be clirectly applied it1 ( X 2 5 ) to calculate il(;li3rti bt>c;iuse ni is the s t a r t i ~ ~ g point of the stanctarci \tiietler process f l r ( y ) , and if' it is changed it changes the probabilities of' reaching a given bourltlar-v H ( v ) . However, / ( s o ) is the derivative of F ( y 0 ) which i r ~turn is tlehried h. !

-1 his means that if lo(!),f ( I ) ] was a feasible policl pair- prior to the ch;+rigthin )a, then the new feasible policy pair is [ H ( T ) dtn,f ( , ~ ) ] . In other words, after the change in m , the boundary [ @ ( j )+ rlm] induces the same first-pilssag-e (tensity / ( Y ) as did the bi)unda~-y prior to the change in r n , and this holds @(?) ilrri car1 be for all boul~dal-iesN v ) . I herefore. the c h a n ~ eft-on] rn to rtl considereti as having n o effect o n the feasibilit) o f reaching a boundar), but sir~lpl\ s changing the form of the pa).of'ffunction frorn 5(11', Y ) to [(It' + iim, a

y).

Application of ~heot-cnl then viclcls (5

and sit~cef(v) ;I density. a(:latri > 0. iI#ain, the ?rate (171,o ) is arbitrar-y,ancl a is siniilar I.CSLIII tloltis f i ~ r (irCiilll')(l.t', >). 1.ettirig f ' ( 1 ) / ( r ) ( d ~ M the the first) passage pr.obabilitv in the ol.iginaI rirne scale,

7 ' h ~ o t - ~7.-$(t) is norlctecreasing in t. tn Prorj.-By contraciiction, suppose that at t*. H(t) is decreasing. Then there exists ari E > 0 sufficier~tly small such that the points [H(l*),t* + T ] for T E [ O , 1 all lie in the continuation region. Therefore, since C > Q in the continuation region, ~ [ $ ( t * 1" , )

+ 1 > c [ @ ( l * )/,* I = Q.

(A31)

988
But

JOURNAL OF POLITICAL ECONOMY

In vie\\. of (A27). S ~ n c e(A32) is a contradiction to (A31), the theorem ic i proved. 7I~~o7~m 8 -11m 6 ( t ) = r (2
1-z

Proof.--Since

6 ( t ) = B[s - S(t)] = %(y),it is sufficierlt to prove tllal

lim O(y) = rQ.
V

-s

(A33)

Bp contradiction, suppose that lim #(y) = q and that q < rQ. Now choose6 > 0 such that q + 8 < rQ. By theorem 7, H(y) is nondecreasing iny. Tllerefore the point (q + 6, s - E ) 111ustlie in the continuation region for all)- E > 0. In terms of the present value function V(\,tr, J ) and the present value of the payoff function < ( W ,J ) , this 111eans that
u-L

where f'fq + 8 , .( - ~ , yis) the probability (density) that the game will end aty E [r - E , J ) given that M'fs - E ) = r) + 6. Since { is decreasing in Mr and decreasing in j arid since H(y) is nondecreasing, 4[8 (s - E ) , s - 1 > <[H(J), ] . y for y E (.r - E , 5 ) . *I'herefi~re V(q

+ 8. s - t ) < <[H(s - 1, s - 1

Furthermore, f ( q + 6, s - t , y) is the first-passage density of the standard Wiener process (originating at q + 6 at s - t ) through the boundary #(y) on the interval [A - t , s). Then the integral on the right-hand side of (A35) is smaller than the probattilit)- that the same standard Wiener process will cross the threshold sup B(y) = 7). From Feller (1966, p. 171) this latter probability is
\C=,,--e

S"
S-f

+ 6, s

- E

(A351

,\

equal to 2[1 - T(t-' '8)] where.V(.u) = I:m(2.rr)-''2exp[- 112 u2]~lzcz.Therefore Equat~ons(,.236), (A34), and (A12) then imply that

[Q - r - ' H ( c - ~ ) ] 2 [ 1 A'(E I %)] > [Q - r '(q + 6)] > 0. (A37) But since 6 0 ) 1s nondecreasing, and since by assumption linl O(y) = q < rQ,
u-8

(Q - rq)2[1 - A'(t-"L6)] > [Q - r-I(q

t

+ 6)].

f.438)

T h e right-hand side of (A38) is positive and does not depend on E.Therefore may be chosen sufficiently snlall such that the inequality in (A38) does not hold. ?'he theorem is proved.

References

Az;rriadis, Costar. .'Implicit (:ontracts and Underemployment Equilibria." I.P.E. 83, no. 6 (December 1975): 1183-1202.

JOB 3fATCHING A N D TURNOVER

g89

Baily, Martin N. "14'ages and Employriierlt untier Uncertain Dctn;ind." Rrcb. Ecorr. Stzcdirc 4 1 , no. 1 (Januar) 1974): 37-50. Aartel. A. P. Job L'fobility ant1 Earnings (;t-o\~.th."\\'orking Papel., Nat. Bur. Econ. Res.. 197.5. Barrel, A. P., and Bor:i:is, G. ,I. "Zliddie-Age Job Xiobilit! ." \\'orking Paper, S a t . Bur. Econ. Res., 1976. Bnrdett, Kerlncth. "'Thcor> of Ernplo!.ee Search: Quit Katcs." z*l.b:.Ii. 68 (blar-ch 1978): 2 12-20. I'ariations in \'oluntary Rurtori, J o h n F.. and ParLer-. soh11 E. "Inter-i~rdustr? Lahor I\Iot)ility." Ir~dus.clnd 1.rrhot. R r l < ~ t i oNril. 22, rio. I (j;~rlu;ir? ~l 1960): 199-2 16. ~ : t i e r ~ i o fH. "Optirnal Stochastic Control." Snrrlrlrjrr, Ser. .A, 43, no. 2 (June l, 1968): 1 11-42. (;ox, David K.. and hfiller-, H. I). 7 % 7%t~or!of Stocitcrstic I'rocrc.r~s. S e w York: ~ i\'iley, 196.5. Feldstein, hiartin S. ".I'enlporar> l.a!ofZ's in the 'Theory of' I~rlcriiploymelit." J.P.E. 84, no. 5 (,October 1976): 937-55. t 1'01.2. Feller, Williarn. '4 tr I~rtrodzrctio7~o Probcrhilitj Throry iitrcl Its A/~~>lzc.(ttiort.\. 2d e d . New York: It'iiey, 1966. Freeman, K. B. "Exit Voice Tradeof'f'in the I.ahol- I\l;~rket: I:nionisln, Quits, anti J o b T e n ~ ~ r e Unpnhlished paper-. Harvard Univ., 19715. ." .4.E.li. Hirslrleif'er, Jack. "iCller-e Are \Ve in the Theory of' Info~-~ii;~tioli?' 87 (XIay 1973): 31-39. Johrison, W. .'.A L\I'heor> J o b Shopping.'' Ql1.E. 92 (bra! 1978): 26 1-77. of' Jo\.anovic.. Bo)ari. "Joh Xfatching and the Thcor? of Turnover." Ph.D. disser.tation, I,'riiv. Chicago. J u n e 1978. ( ( 1 ) . "1,abor I'urnovet. Whel-r J o t ~Are Pure S e ~ ~ r c h s (;oods." I:np~tblisheci paper, Colurribia Liniv., Fet~ruary1978. ( h ) .Jovanovic, Ro)an. and Minter, J;lcoh. "1,;tl)or Mobility and \.17;~ges." I:npublistied paper. <;olumbia Utliv., Julie 1978. Kuratani. 31. "Theory of'l'raining, E:;n.riings, arid En~plo!rnent: .An r2pplic;1tion to Japan." Ph.11. disser-tation, (;olumbia U n i \ . , 1973. ~t~~ K Kushner, Harold. introductinn to . S t o ~ h ( t . Co~ltr-01. C\\.York: 1 folt, Kincti;t~.t 8r \Viriston, 1971. l.ucas, Robert E., JI-., arid Prescott. Edward C . "Equiliht-iurn Search and 1974): 188-209. Unemployment." J . Erotr. T I z ~ w y7, no. 2 (Fet)rua~.y Zliroshnicheriko, .T. P. Optimal Stopping of' an Integral of' a M'ienel. Process." Thro? c i j Probnhiii/y unci It.\ Appl. 9 , no. 4 (July 197.5): 35.5-62. klortensen, 1);tle '1'. "Specific I-l~trnanCapital Bargztining anti Laltor TLII-11over." Disc u s s i o ~Paper, Sor.tti\cestern mi\ .. .\la~.ch1978. ~ Selson, Phillip. "Infor~nariorl and Consurnel- Behavior." ,].P.E. 78. no. 2 1970): 31 1-29. (XI~lat-chiAp~.il p. .. ,tlsons, Donald. 0 . "Specific Hurnan Capital: An .Applicatiori to Quit Rates rid Layoft' Kates.",].P.E. 80, no. 6 (Novernbcr-/l)cce~~~l>er 1120-43. 1972): Penc;~vcl,J o h n H . i l n Ancilj.\i\ i f tlrr Qtrit Kcltr in .4tnrriccrr~ .Lf~ln~rfnclurilzg PI-inceton, N.J.: P r i n c ~ t o nCnik. Press. 1970. I~~(ii~.{try. Kothschild, h'lichael. "Searching for the Lowest Price When the I>istribution of Prices Is Ilnknown." J.P.K. 82, 110. 4 (Jul>!hugust 1974): 689-71 1. Rp-0. Eron. Studir>t Salop, Steven. "S)stcnratic J o b Search arid Cne~nplo!-~nerit." 40 (,.April 1973): 191-202. Shiryaev, AI'Bert N . Stcrti,\ticnl S ~ q ~ ~ r ~ d t4i ~ ~ ( ~ l j ~ i ( : S ~ o ~ ~ p i r r g ~ K z i l r , ~ . l nI Optin1~~1 Providence, K.I.: Anlerican I\lathern;~tical Society, 1973.

9g0

J O U R N A L OF PO1,ITICAL E C O N O M Y

Stoikov. Tlaclin~ir, and Ramon, R. I,. "Deterrninn~~ts of'the 1)iffel-ences in the Quit Rate anlorig Incit~stries."A.t.:.R.58, no. 5 (Decert~ber 1968): 1280-98. '1-else!., 1.este1. G. C ) ~ l p ~ t i r i ( ) (;ollu.tiorr m 1 2 d (;cinrr Tilror).. (:hirago: Aldine ,t, A121erto11,1972. Viscusi, k. ':Jot) Ha/artls ;tnti tVorker Quit Katcs: ,411 Analysis of' Adal)ti\e Workel- ISchavior.." Unpublished paper, North\vester-11 Uriix ., 19'76. M'ilde, 1.. " \ n 11lfi)rniatiori-theol-etic- pproach to Jot) Quits." Social Science A Lt'or-king P:tpc~-n o . 150, (:alifo~-niaIllst. Tec-linol., 1977.

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[Footnotes]
5

Systematic Job Search and Unemployment S. C. Salop The Review of Economic Studies, Vol. 40, No. 2. (Apr., 1973), pp. 191-201.
Stable URL: http://links.jstor.org/sici?sici=0034-6527%28197304%2940%3A2%3C191%3ASJSAU%3E2.0.CO%3B2-N

References
Wages and Employment under Uncertain Demand Martin Neil Baily The Review of Economic Studies, Vol. 41, No. 1. (Jan., 1974), pp. 37-50.
Stable URL: http://links.jstor.org/sici?sici=0034-6527%28197401%2941%3A1%3C37%3AWAEUUD%3E2.0.CO%3B2-4

Systematic Job Search and Unemployment S. C. Salop The Review of Economic Studies, Vol. 40, No. 2. (Apr., 1973), pp. 191-201.
Stable URL: http://links.jstor.org/sici?sici=0034-6527%28197304%2940%3A2%3C191%3ASJSAU%3E2.0.CO%3B2-N

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