Staff Reports
Replacement Hiring and the Productivity-Wage Gap
Number 860
June 2018

JEL classification: E32, J63, J64

Authors: Sushant Acharya and Shu Lin Wee

A large and growing share of hires in the United States are replacement hires. This increase coincides with a growing productivity-wage gap. We connect these trends by building a model where firms post long-lived vacancies and engage in on-the-job search for more productive workers. These features improve a firm's bargaining position while raising workers' job insecurity and the wedge between hiring and meeting rates. All three channels lower wages while raising productivity. Quantitatively, increased replacement hiring explains half the increase in the productivity-wage gap. The socially efficient outcome features fewer low-productivity jobs and a 10 percent narrower productivity-wage gap.

Available only in PDF
AUTHOR DISCLOSURE STATEMENT(S)

Sushant Acharya
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Shu Lin Wee
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.