WAGE PROFILES AND IMPERFECT CAPITAL-MARKETS - A POSITIVE ANALYSIS

This paper examines the structure ot long-term employment contracts when labour is mobile and risk averse, employers are unable to monitor workers' outside job offers, workers cannot borrow against future income, and workers' productivity is increasing in the length of service with the long-term employer. Workers are then liquidity constrained, and the contract trades off consumption smoothing against efficiency in turnover. In contrast to previous papers which have examined this problem (Arvin 1991; Lam et al. 1987), this paper provides a continuous-time formulation which permits a detailed characterization of the properties of the wage profile.