Abstract

A “constant” wage is pair-wise inefficient in a standard search model when workers endogenously separate from employment. We derive a pair-wiseefficient employment contract that involves workers paying a hiring fee (or bond) upon the formation of a match. We estimate the constant wage and pair-wiseefficientcontract assuming the hiring fee is unobservable, and find evidence to reject the pair-wiseefficientcontract in favor of the constant wage rule. A counterfactual experiment reveals the current level of laborforceparticipation to be 9.6% below the efficient level, and a structural shift to the pair-wiseefficientcontract improves welfare by roughly 3.5%.