Abstract :
Consideralabormarketinwhichfirmswanttoinsureexistingemployeesagainst
income fluctuationsand,simultaneously,wanttorecruitnewemployeestofillvacant
jobs. Firmscancommittoawagepolicy,i.e.apolicythatspecifiesthewagepaidtotheir
employeesasafunctionoftenure,productivityandotherobservables.However,firms
cannotcommittoemployworkers.Inthisenvironment,theoptimalwagepolicy
prescribesnotonlyarigidwageforseniorworkers,butalsoadownwardrigidwagefor
new hires.Thedownwardrigidityinthehiringwagemagnifiestheresponseof
unemploymenttonegativeshocks
