Wage Profiles and Imperfect Capital Markets: A Positive Analysis

This paper examines the structure of long-term employment contracts when labor 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, this paper provides a continuous-time formulation that permits a detailed characterization of the properties of the wage profile.