Wage structure when wage offers are private

Abstract

In this paper we analyse the structure of wages of workers in contract firms for a two-period economy in which there is interfirm mobility. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to join an alternative firm after a successful search. When the worker cannot borrow in capital markets, the motive for consumption smoothing dominates and the contract firm acts as a banker and sets wage above marginal product in the first period and below it in the second. When the worker can borrow, insurance is the dominant concern and the contract firm acts instead as an insurer by setting the first-period wage below marginal product and the second-period wage above it. This dichotomy will fade away if the contract includes an exit fee as a quit penalty. © 1995.