A general stochastic model of optimal job separation behavior is developed in the paper. The model nests both the job training and the job-matching hypotheses of the wage-tenure relationship as special cases. The purpose of the paper is to compare the implications of the two hypotheses for job turnover. That expected wealth-maximizing separation strategies are qualitatively identical under the two hypotheses is the principal theoretical result. Although the empirical implications of the two hypotheses for observations on the distribution of completed job-spell lengths are similar as a consequence, they are not quite identical.

[The properties of systems of investment equations derived under the hypothesis of present value maximization are investigated. The possibility that either the optimal time rate of change in some factor or the stationary level of some stock may increase with its own rental rate is shown to be consistent with the hypothesis in the case of more than one factor. A condition necessary for this result is that marginal products depend on the rates of which factor levels are justified.]

Dale T. Mortensen delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.(This abstract was borrowed from another version of this item.)

The simplicity of the canonical search and matching model offers many advantages for the purpose of understanding the determinants and dynamics of unemployment. However, the spe cial assumption that a firm is composed of a sin gle worker and employer or that the production technology is linear is limiting. Lars A. Stole and Jeffrey Zwiebel (1996), Asher Wolinsky (2000), and Elhanan Helpman and Oleg Itskhoki (2008) generalize the original model to the case of many workers in a firm with a technology characterized by diminishing returns to labor. They find that all employers pay the same wage in steady state equi librium when only unemployed workers search. I extend their model by allowing for search on the job and show that a unique dispersed wage steady state equilibrium also exists with the prop erty that more productive employers pay more and are larger. Furthermore, inefficient characterizes the single wage equi librium, but employment is lower in the dispersed wage equilibrium because employers face stiffer competition. As a consequence, the dispersed wage equilibria can be more efficient. There is a close relationship between the equi libria of the search and matching model studied in this paper and those of the dynamic monopsony models of Peter A. Diamond (1971), Kenneth Burdett and Kenneth L. Judd (1983), and Burdett and Dale T. Mortensen (1998). The single wage equilibrium is the analogue of the Diamond equi librium while a dispersed wage equilibrium exists when employed workers search for essentially the same reason as in the Burdett-Mortensen model. Namely, there exists a nondegenerate interval of wages and a continuous distribution of vacancies over the interval such that the common

Paul Gayer and Robert Goldfarb (G-G) are certainly correct when they claim that job qualifications are imperfect predictors, not accurate measures of the potential productivity of prospective workers. Their statement that my neglect of this distinction and the learning asymmetry, namely that employers have the opportunity to learn about the true productivity of any employee but not about the productivity of any rejected applicant, are responsible for my conclusion that there is no long-term tradeoff between unemployment and inflation may also be correct. However, G-G confuse the issue by appealing for the relevance of institutional and organizational on wages; this argument is not needed to make their case. In my opinion, they have also overlooked potentially important contributions to our understanding of unemployment, underemployment, and aggregate labor productivity. In this reply I attempt to clarify their argument on the Phillips curve issue and to point out some of these other contributions. To see clearly the implications of the G-G hypothesis for the Phillips curve, we must contrast the equilibrium situation implied by the model analyzed in my paper with that implied by the model as they amended it. For the purpose of the comparison, we explicitly assume that there are no artificial constraints on the eventual adjustment of wages. Hence, in either situation, the wage structure defined as a relationship between wage offers and qualifications will adapt so that all of those willing to work, given the structure, will be able to after an appropriate period of search. This conclusion appears to be at odds with the G-G statement, elaborated in footnote 3, that wages at the lower end of the structure may have to be negative. This appearance of conflict is resolved when one recognizes the fact that participants will decide not to supply their services well before the wage offered falls to zero. In terms of classical supply and demand analysis, it is reasonable to expect, for the reasons given by G-G, that the demand curve for labor whose qualifications are sufficiently poor will intersect the wage axis at a level equal to no less than the wage at which the supply curve intersects the same axis. In other words, no worker with these qualifications is willing to work in return for either his actual net marginal product in my world or his expected net marginal product in the world of Gayer and Goldfarb. Although the characteristics of equilibrium in the two cases can be described in identical terms, the interpretations differ significantly. First, consider the case in which qualifications and productivity are equivalent. Although we may lament for those whose low productivity have forced them to decide to stay home with the kids or engage in some other nonmarket activity and we may recommend training programs and minimum incomes as solutions to their economic plight, we cannot objectively classify them as involuntarily unemployed. However, if qualifications are only related to productivity in a stochastic sense, then there will be some among those who have chosen not to work who are nevertheless productive enough to earn a wage at which they would be willing to work if the true facts were known to the appropriate employer. Their unemployment is hidden behind a veil of imperfect information and will remain so because the existing information exchange mechanisms will not reveal the truth in equilibrium. One is hard pressed to classify the situation of such workers as anything other than involuntary unemployment. What about the Phillips curve? Having * Associate professor, Northwestern University.

The paper has two purposes: (1) to extend the theory of job search to include the case in which job prospects are characterized by layoff risk as well as the wage and (2) to synthesize the search and implicit-contract approaches by using the former to model the supply side and the latter to model the demand side of a labor market. The result is a simple and consistent theory of labor market equilibrium under conditions of imperfect information and uncertain derived demand. The theory purports to explain both search and layoff unemployment as market equilibrium phenomena.

The paper has two purposes: (1) to extend the theory of job search to include the case in which job prospects are characterized by layoff risk as well as the wage and (2) to synthesize the search and implicit-contract approaches by using the former to model the supply side and the latter to model the demand side of a labor market. The result is a simple and consistent theory of labor market equilibrium under conditions of imperfect information and uncertain derived demand. The theory purports to explain both search and layoff unemployment as market equilibrium phenomena.