ABSTRACT
Any wage differential between these two later markets should be reflected in quit decisions made at the end of period one. But, since workers in a two period model retire at the end of period two, no such consideration influences their quit decisions. Within this framework, the most serious simplifications concern the nature of production and the characteristics of individual workers. The interesting implication is that wages increase at a rate of less than one half any increase ability. Thus, the effect of internal labor markets is to impose a tax on higher ability of more than 50% of potential wages (if “potential wages” are deemed to be those equal to a worker’s productivity). Finally, random turnover acts as a potentially important lubricant in labor markets with adverse selection, and barriers to mobility, such as quitting costs, tend to be magnified by adverse selection.
