produces output yijt given by:
(2)
yijt = dj + cj (ηit + εijt )
where dj is the output produced by a worker in job j that is independent of the worker’s
characteristics, cj measures the sensitivity of job j to effective ability and εijt is a random
variable drawn independently from a normal distribution with mean zero and variance σ2 .
The constants cj and dj are known to all labor-market participants and it is assumed that
c3 > c2 > c1 and d3 < d2 < d1 .
Wages are determined by spot-market contracting. At the beginning of each period, all
firms simultaneously offer each worker a wage for that period and each worker chooses the firm
that offers the highest wage. Competition among firms yields wages equal to expected output.
wijt = Eyijt = dj + cj ηit = dj + cjθif (xit)
(3)
Efficient task assignment is obtained in the sense that a worker is assigned to the job that
maximizes his expected output.
In the case of perfect information, θi , is common knowledge at the beginning of the worker’s
career and therefore ηit is always known. In this case, job assignments and wages in equilibrium
are given according to the following rule:
1. If ηit < η' then worker i is assigned to job 1 in period t and earns wit = d1 + c1 ηit.
2. If η' < ηit < η" then worker i is assigned to job 2 in period t and earns wit = d2 + c2ηit.
3. If ηit > η" then worker i is assigned to job 3 in period t and earns wit = d3 + c3ηit.
The critical values, η' and η", are those levels of effective ability at which a worker is equally
productive at jobs 1 and 2 and 2 and 3 respectively. In equilibrium, workers climb the successive
rungs of the job ladder as they gain experience.
The model under perfect information can explain most of the stylized facts of the empirical
literature. The model exhibits an absence of demotions, serial correlation in wage increases
and promotions, and the fact that wage increases predict promotions while explaining only a
fraction of the difference in average wages across levels.
There are no demotions in equilibrium because effective ability increases monotonically.
Serial correlation in wage increases occurs because effective ability grows differently for each
worker due to their differing levels of innate ability. That is, for a given level of experience, high