ABSTRACT
The three period model shows the entry of new workers into the labor force and their employment with firms. At the end of the first period, a secondhand market occurs, offering workers the opportunity to change jobs. At the end of the second period, each stream enters a second trading period with its own distinct secondhand market in which workers again stay or quit. At the end of the third period all workers retire. If changes in quit behavior, interest rates, technology and abilities apply to all future entering generations following those currently passing through the labor market, then the “long run” changes describe the shift to a new steady-state. Real labor markets are unlikely to provide signals which are so clear cut. If firms are unable to measure their employees’ abilities perfectly, then some inferior workers will be kept on at the end of period one.
