Wage-experience Contracts and Employment Status

The objective of this paper is to study equilibrium in a labour market in which identical firms post wage-contracts and ex-ante identical workers search on the job. The main novelty of this paper is to generate dispersion in contract offers by allowing firms to condition their offers on workers’ initial experience and employment status although these characteristics do not affect productivity. In this context I show that changes in firms’ information set at the moment of recruiting can have strong effects on wage dispersion and turnover without changing the agents’ payoffs. I construct an equilibrium in which firms compete in promotion contracts. Employed and more experience workers are offered better contracts with shorter time-to-promotion periods. This implies contract offers are disperse within and between experience levels. The earnings distribution within the firm is then such that workers who have acquired more “outside” firm experience and more tenure are higher in the earnings scale. This generates workers cohort effects within a firm that depend on the level of experience at which they where hired.