We would like to thank an anonymous referee, Patricia Dillon, Lones Smith, Randall Wright, and Dale Mortensen for more than helpful comments. Of course, we are responsible for remaining errors.᭧ 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
In this study we consider a labor market matching model where firms post wagetenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage-tenure contract that implies a worker's wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a worker's wage can be due to job-to-job movements as well as wage-tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.
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