In this paper, I study the wage a firm sets to attract high ability workers (hipo's) in situations of unemployment. I show that the higher unemployment, the larger a firm's incentives to sort high and low ability workers. Moreover, workers will signal their (high) ability in situations of (high) unemployment only if a job offers a high enough wage. The main result, therefore, says that a firm sets higher wages, the higher unemployment. As the model is applicable to the upper segment of the labour market, the result is in line with the empirical fact that income inequality increases when more people are unemployed.

labor market, monopsony power, screening
Noncooperative Games (jel C72), Asymmetric and Private Information (jel D82), Monopsony; Segmented Labor Markets (jel J42)
hdl.handle.net/1765/7693
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Janssen, M.C.W. (2000). Catching Hipo's: Screening, Wages and Unemployment (No. TI 00-028/1). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/7693