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.
Stable URL:
http://links.jstor.org/sici?sici=0022-3808%28197910%2987%3A5%3C972%3AJMATTO%3E2.0.CO%3B2-Q
The Journal of Political Economy is currently published by The University of Chicago Press.

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at
http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained
prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in
the JSTOR archive only for your personal, non-commercial use.
Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
http://www.jstor.org/journals/ucpress.html.
Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.

The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic
journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers,
and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take
advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org.

http://www.jstor.org
Wed Jan 30 05:37:30 2008

Job Matching and the Theory of Turnover

Boyan Jovanovic
Hul( Lnhorctlorzr.~,I n r . , nnd Collrrnh~c~
b'uiz*~~.~it).

A long-run equilibriurri theory of turnover is presertted and is

shoivrr t o esplaiu thc irnporta~ltregular-ities t1i;tr have l~erlloktser-ved
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~ttionof' tlic wor-her's produc-tii~it~
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-~anentjob separations. A permanent job separation involves a
change of employers for the worker. 7 1 - e ~ ~ ~ p o rseparatiolis
ary
(consisting 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 ~ yPh.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
thl-oughout the prepararior~of 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.
<$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

[[rifrrrini

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 ocvork in industries with loxver conce~itratioriratios ox- with snlaller
average firm size. None of these relationships is nearly as strong as
that bct~veenjob te~iur-eand sep;~t-ationpl-obabilities.
Existing ~nodelsof' iurnovel- (that is the "pel-manent separations"
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 ~nodelsof Viscusi (1976), M'ilde (I%$),
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~icularrnatcll 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-tionis ev;llu;ition that car1 take place
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-is paitf
his ~narginal~ I ' O ~ L conditional
I C ~
upon all the :t\.ailal,le inf0rnlation at
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$-it11the evidence. T h e rnodel predicts that worker-s
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~ctsfor all \vorker-s, the nod el generates (011 average)
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
t h the life cycle. T h e model also pi-edicts that each !corker's
separation probability is ;I clec:~-easingf i ~ ~ l c t i oof'
n his ,job tenure.
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~it is assumetl that for
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.
111dividtt:tI contracting creates a structure of re~vai-dsth;it PI-ovictes
p r o p e ~ s. ignals 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 ~on
~ ttheir- perforni;~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
an initial asr m v inforrn~itionlteco~nesavailal,le, a n d I-eassignnient besig~~rrient,
comes 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.
-,

975

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

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

X(t\

= pt

+ m(t)

(for each

> 0)

(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]).
T h e n X(t) is nor-n~allydistrib~tteclwith mean yt arid ~ . i t h
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'
i output as given by eq. [ I ] ) is generated. A
"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~pletelynratch 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
posterior mean

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

posterior v;~riarice= S i t )

(.?-I

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

.l'lie pair- [X(t),t ] is thu-efi~rea sufficient statistic for the information

co~ttainectin the entire posterior distribution. ('Ihis property is essentially 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~ltlependcncewhile perfect informational
generalits is associatecl wit11 perfect correlation.

JOURNAL 01: POLITICAL. ECONOhlY

976

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
u lwell
d understood 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~verhis wage by an arnount sufficient to itrctuce
him tct quit. ,411 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 slayoffs).
?Yorkers are assumed to live for-ever," ancl this assumption justifies
the exrlusio~iof age as an explicit. argument from the wage function.
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!])
be the present value to the worker of
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!]
a nd Q) and F(t [ u ~ ] ,
(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~nulativeoutput

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

utrrl implvitry: the ;tt)srtice of aging+)nc. \\trultl not r~litkerl diff'cr~tltpledic-tion ,ihouc
the Irt~gthof tlw t.rtn;iining litc of a \\or-ket-tvho has ;iIrc,~dvliveti d l o r ~ giirr~cth;~nfor a
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~-rsthat (lie war-ker never returns to a jot) from
~vhich he once separarect. 111other- \vo~.tls.if i t esistetl, the optiori of I-cc;~llW O L I I ~ rrever.

be exrrcisrd b\ ttle wet-kcr .

977

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

doe4 not exceecl x. I'hen define the appropnate ctens~tiesh ( r ,t [ u l ] ,Q )

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 ~voikei In respon5e to a wage function X I ( . ) and ,I p ~ e s e n vt alue of
quitting Q. -1 hen

Equ;ition (4) holds at the optimall?. chosen f~inctionsh and f . Since f

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 ~vorkeris offered
the same wage cor~tract.~
In differential form, equation (1) reads d X i t )
= pdt + cdz(t). Letting E,,, be the mathematical expectation operation
conditional on X(t) = x at t , the disco~~nteci
revenue from the output
= EfreF'"
of a single worker is ~ f : p - " d ~ ( t ) = E f Te-vfl;v,,,fd~(t)
E,,,,,(p)dl + E f Tu -'.'~E~,,,,di(t).
'l'he stochastic integrals are It6 integrals (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],Q )dxrlt = P(Y, [il.~]). Firnis are aware of the worker'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],Q ) d t .
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.

Let 13 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.,his optimal quitting

' 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~guishamong 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.

JOURNAL OF POLITICAL ECONOMY

Y ?a

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~octrlct .it each rnomerlt 111 ttrne.
1x1Qv =Q([itx4]).
? h r o ? ~ ~I n-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 othat
~ ~ F2 1s ttot \,ltlshed b\ w v 40 th,it t h e ~ e\ilst\
c
sorne
711 E H such that a d e ~ l a n tf t r m offers ~t
1

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

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,
t ) anti the
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,
/ ) d t + crE,,clz(t) = ilr*(x,
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],
Q ( [ ~ L ' ] ) ) = J'{f 1 [711], Q([af*])).
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 situation irl which each firm offers a wage corttract zom(x,t ) = E,,(p).
Purc.to optirnnlity rft~irri'ozlrr.-Sint:e all the agents are risk tleutl-al, the

[ z r l * ] ,

979

JOB MAI'CHING A N D TURNOVER

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 zc and t , 6

t ) = i ~ l A t P - ' ~ ' E , ~(~~t[t

Y + At], t )

~'(ZU,

+ 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 )r epresertts ttarlns rentling to zero f'aster than At does. Note that the optiort of
stopping or1 ( t . t + At) (in wtlich casc a rcwartl Q is rollectecl) is exercised wirh a
prob;ibilitr. that hehaves esser~tiall\ as does

;I
I

- '\

1-q

(At)' -

(At)' "

<v 5 z CXP

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 ) .

JOURNAL OF POLITICAL ECONOMY

980

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),
t ] - V,[e(t), I]. A welI-kno.ilm
"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:V ( W ,1 ) = Q + ji',,V,.fv. /)rlv is rnaxinrircd with

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,
obtains that V',.[@(t), t ] = 0, which in turn implies V , [ @ ( t /)I, = 0 since V [ % ( t )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+=
1.0detel-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 )is likely to
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
r
a linear I,ottndar) (Cox and Miller- 1965, p. 221).
'" '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,

JOLTRNAL OF POLITICAI. ECONOMY

982

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~vertor a worker ivho has experienced many job separations."
'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 ~.andonivitriahles. 'The turnover generated 1)); the model
therefore fi)~-msa pure renebval process (see Feller- 1966, chap. 11).
Let y denote the ivorker's labor market experience and 11(3') + o ( A J )
denote the pl-oljability that the worker experiences a job separation o n
the market experience interval (.y , .u
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~isticssuch 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~nctionsof these ~ariahles,with each
distinct group of \vat-kers treated as though they belonged to a distinct
lnarkct of' \vorke~-sof that type. T h e entire ;tiialysis I-emains valiti co
long as infi)rmational synirnetr\- l,et~veen wol.ker.s and ernplo?ers
is rnaintainetl, so that issues of sigr~alingartrl 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-istics 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~;I group ol'obsc~.\,ition:iIl).
t-qui\;tletit prople t l ~ o that
e have changed
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~oulddo
\$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:~ticalc.rpec-tationof'
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~sniadr in the text following equation ( 1 2 ) ahout
@ ( I )the
, bourlci;~~-)
of the optinlal contirtuatiori region. We pr-ove that H ( t ) < 1-Q
tbl. all I , that @ ( I ) is r~ontlecre;~sirig.
and that i t approaches t-Q as t tends to
irifinity. Sorric transfol.rrl;itior~sof the original problcrri \\ere rlccessary before
these ;~ssc.r.tionsco~tl(lIlc proved, anti since tllese tr;insforrnatic,rls move orle
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
elenier~taryeverits (wE0;t).For any real-valued F-n~e;isurablefunctionf ( w ) , the
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\
t i ( \ ) I>e g i ~ c r \the11
u ( \ ) deliotes the Irr\rnnt<lneous p,i\oft to the
fi~rlctror~
~,
111.1\c.r at trnw 1 ~f the p~irrrc~
1s st111 111 progless ~ 1 tt a~rctr f \ ( 1 ) = 1. Let Cr (1) be
the rc.1 rr1111,rl p,~\offfurrct~olicler~otingthe utrllt\ to the plarer if the g~lrne13
stopped c\,lctl\ at I ,rritl S ( I ) = \ I he player's otqectl\e 1s to rnn\lrrirle h ~ s
\
pla\ ~ n rlre
q garrre ( ~ t ~) t=h 11it. t l ~ s c o ~ llate)
~rt
e\pectt,cl tlrscourrtcd i ~ t ~ l r tfrorir
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
~
to the
oy)tirir;il stoppirig tirnc for X ( r ) . L.et C ( n , I ) he the value of t h gaiitt.
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 )~- it l~ * ( ww) ~, , T * ( ~ ) ) ,
-

('14)

;~rtdco~~sitlerthe problem of' irtaxirnizing

F

6,

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

i A.5)

over s~oppirig-tirrlet'urictions 7.(w). I.er f ( w ) be the optirnal policv for rhis

pr~ohlerr~.
'llierr the follo~virigtt~eorernt~olds.
7 . h ~ o r r m3.-If E J : I , - ' . ~ul.Y(t,
]
w ) , / I ~ { I<
I r , then f ( w ) = 7'*(w). a t d

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 ethe gitrnc
is plavetl cart be transfot.med into problenis such as (A.5) ~\.hichinvolve ol-rl a
trrrninal pa\of'f function g(x, /). Note that C'(r, t ) is the current value of the
policy "never stop the garne no mattel- wh;~th;ippe~-rsto 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 ~ d. X ( / ) is ;I l.lat.kov pl-occss j\.ith instantaneous
nrean n ( . ) and instantaneor~svariarice [ b ( .)I2.
-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
l atf(litior-1to the
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~isT ( 0 ) .Assume that the firtictiorts c r ( . ) , h ( . ) anti
((.) a r e :dl t~vicecontitluouslv 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.
= Ex,,,,
( p ) = IV*(t) be the basic llarkov process defined o n
Let ii~*[X(i).t]
F. P ) . 'The worker rllaxirnizes discou~itectexpected earriings. His instal-itatleous utility is It'*(/),while the tcrrninal p a ~ o f fftinctiorl 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.

o
'I'heretorc the courlterpart of' I.'(x, t ) is
E , * , J,P-''s-"w*(.s, w)dc = r-lLl.r*. 7'herefitre. g(x. t ) = Q - r-'lV*. Since
E J ~ P - "I IV*(t, w ) tit < x , t.heo~ern3 ma) he applieti to the pro1,lenr to
cortclutle tltat the solution t o the worler.'~prohlenr o f r r ~ a x i n ~ i ~ ithe
r r g espr-cssion 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 lsolution, 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 ) -~ - ~'1, art0
~
k'*(w) -- \ - S [ ' / ' " ( w ) ] .

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
LO, s), \kith only a terminal payoff' function

1 heoren] 4 m,iI no\\ be appllecl to tht\ problem ~ \ r t h( I ( . ) = 0, b ( . ) = 1 Lct

V(iZ. J ) bc the ptesent \ , ~ l ~ funttton
ie
for thts prohlenl ticfinetl b~

1'1o~x)~tt10t14
of the theorern nssel ts that ,I C I ) hrre I1 15 the contitluatlon
regtot] for the proce\s L1Z' (I), 1J I.ct [$(I),I ] he [he t)ouritlai\ of the corrttnu,%tlon rcglori. I hen [B(?),3) Ff A +
0 )

for tlO, 0

-1 he 8 ( > )i i ~ t r eresct\,itiotl \\,lge I? the (It', \ ) \p'i<c Let

\\age in the (bt'. t ) sp.ice 1 hen B(t) = 01, - \([)I.

r h r o ~ p m5 4
Proof -Along

0 ) < rQ

f o ~)LO,
the boundar) ,

(.I15)

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

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 rotnejOLO,s).f)(jO)
= r Q. Equation (A16) then
implies chat V[f)(y0),y o i = [().(i,
s o) = 0. C:onsitier ria\\. thc value of the
yo):
, For some 8 such that y o 6 < \ , continue thc game
follo~-ing
polic) ;it ( ~ ( 1
~ t r i ~y iol + 8. ?'hen if'71(yo + 8) < 4 2 , stop the galilc at y o + 6, anit collect 5[z1(11"
+ & ) , y o + 61 > 0 . If7?(j" + 8) > rQ, cot~till~ie
the ganir urttilr = 5 , ancl collect a
pi~koffccliial 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 ,R be two par;tmerers. Assun~erllat the evolution of X(t) is not

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~glevaluect. Let h(s, 1 , a , p) be the probability (density) that
the game will not have been stopped befi~ret , and that X(t) = r , and letf(/, a ,

JOURNAL OF PO1.ITICAL ECONOhiY

986

p) 1)r the

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

1 l i r o t ~ n6~( l.117'(~/0po1 l ~ ( o r ~ t-11

n ) a ,lnd /3 do riot ' i f f t ~t the e~olutronot Y (1).
.ind r f I ( ( . ) . (,j ), h ( ), f (.I aild V(.) ~ I cl~fft~ierlt~able
C
\ \ ~ t l rrespcct to a and 8,
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
s t , ~ t t ~other~tr\c.,
l
z c ( ), (,(.),
A t . ) . f ( ), ,~nci 0( )
e\aiu<~ted
,it ( \ , 1 , a, p) Ful the?rilo~e.sllrce the proof f o ~a I \ ,111trost~ d e n t ~ c a l
\\lth the proof f o ~p, oul\ thc l'ltter is p e n

1-1

the theol.e111will have Iteen pi.oveti. Since tht: worket-'s policy i t r r.csporlse to a
a r ~ d/3 is optiliial,

fol a1101p * 0 Subtldc tlng \'(a. /3) from borh s~cicsof ( A y l ) , tli\lil~rlgthlough
In (la, auri taLlrig the llrnlt JS d p
0 , the ierult i\
A change i r ~/3 ilr~plie~,
in genei.;~l,a charrge in the optirrial stopping polic!. But
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 11rfo1nr'itloii
about the t l e ~ ~ ~ , i t l v
ofe \the uorker's cuixcnt \ a l ~ i ef u l ~ t l o r(.(kt
~ ', 1 ) \lnce
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(/),the ar~aloguc.of the right-hand side of'
e c ~ u ~ t i o(.42.i)
n
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 ~ ~point
g
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\as changing the form of the pa).of'ffunction frorn 5(11', Y ) to [(It' + iim,

y).

Application of ~heot-cnl(5 then viclcls

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

7 ' h ~ o t - ~7.-$(t)
tn
is norlctecreasing in t.
Prorj.-By
contraciiction, suppose that at t*. H(t) is decreasing. Then
there exists ari E > 0 sufficier~tlysmall 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)

JOURNAL OF POLITICAL ECONOMY

988
But

In vie\\. of (A27). S ~ n c e(A32) is a contradiction to (A31), the theorem ici

proved.
7 I ~ ~ o 78 ~-11m
m
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

(A33)

-s

Bp contradiction, suppose that lim #(y) = q and that q < rQ. Now choose6 > 0
u-L

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

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

S"

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

S-f

+ 6, s

- E

(A351

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

,\

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

+ 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.
Rurtori, J o h n F.. and ParLer-. soh11 E. "Inter-i~rdustr?I'ariations in \'oluntary
Lahor I\Iot)ility." Ir~dus.clnd 1.rrhot. R r l < ~ t i oNril.
~ l 22, rio. I (j;~rlu;ir?1960):
199-2 16.
~ : t i e r ~ i o fH.
l , "Optirnal Stochastic Control." Snrrlrlrjrr, Ser. .A, 43, no. 2 (June
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.
1'01.2.
Feller, Williarn. '4 tr I~rtrodzrctio7~to 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. 87
Hirslrleif'er, Jack. "iCller-e Are \Ve in the Theory of' Info~-~ii;~tioli?'
(XIay 1973): 31-39.
Johrison, W. .'.A L\I'heor>of' J o b Shopping.'' Ql1.E. 92 (bra! 1978): 26 1-77.
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
s Pure S e ~ ~ r c(;oods."
h
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 C\\.York: 1 folt, Kincti;t~.t
Kushner, Harold. introductinn to . S t o ~ h ( t . Co~ltr-01.
8r \Viriston, 1971.
l.ucas, Robert E., JI-., arid Prescott. Edward C . "Equiliht-iurn Search and
Unemployment." J . Erotr. T I z ~ w y7, no. 2 (Fet)rua~.y1974): 188-209.
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
1972): 1120-43.
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 ~ dl t4i ~n ~I ( ~ lOptin1~~1
j ~ i ( : S ~ o ~ ~ p i r r g ~ K zProviilr,~.
dence, K.I.: Anlerican I\lathern;~ticalSociety, 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~ber1968): 1280-98.
'1-else!., 1.este1. G. C ) ~ l p ~ t i r i ( ) (;ollu.tiorr
,t,
m 1 2 d (;cinrr Tilror).. (:hirago: Aldine
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-A pproach to Jot) Quits." Social Science
Lt'or-king P:tpc~-n o . 150, (:alifo~-niaIllst. Tec-linol., 1977.

http://www.jstor.org

LINKED CITATIONS
- Page 1 of 1 -

You have printed the following article:

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.
Stable URL:
http://links.jstor.org/sici?sici=0022-3808%28197910%2987%3A5%3C972%3AJMATTO%3E2.0.CO%3B2-Q

This article references the following linked citations. If you are trying to access articles from an
off-campus location, you may be required to first logon via your library web site to access JSTOR. Please
visit your library's website or contact a librarian to learn about options for remote access to JSTOR.

[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

NOTE: The reference numbering from the original has been maintained in this citation list.