Imperfect Information and Employment Variability: A Note

Abstract

This paper studies the effects of uncertainty about the workers' skills or productivity on the hiring decisions of a monopolistic firm. When productivity is not observable, and cannot be conditioned upon, less-than-full information is shown to impart a downward bias to hirings across all states of nature. The reason is that the firm, by keeping employment lower than under full information, exploits its hiring decisions in order is shape the probability distribution of workers' types at the firm level.