Asymmetric Information in the Labor Market

Abstract

Asymmetric information in the labor market arises mainly from the lack of access and interpretability of information in isolated labor markets. It is suggested that the problem of asymmetric information is quite compelling if the workers are either new in the labor market so that no employer has information regarding their productivity, or because the labor markets (across regions or countries) do not share information efficiently. The prevalence of asymmetric information often leads to statistical discrimination in the labor market. The present chapter captures the peculiarities of such markets with reference to labor market interactions between native employers and immigrant employees who originate in developing and transition countries, largely. The flow of migrants is rather large for the Organisation for Economic Co-operation and Development (OECD) countries, but the analytical dimensions of this model and the subsequent discussions should find ready relevance for rural–urban migration and south–south migration of skilled and unskilled workers also. The occupational patterns evolving in such labor markets provide some interesting results. The analytical results are supported by a large number of numerical examples and graphical depictions describing the patterns of income growth and variance across groups of native and immigrant workers. The results also help to explain the preponderance of entrepreneurial or self-employment activities for certain groups.

Appendices

Appendix 3A

Proofs:

We show here that if ${{\left| \frac{\delta r_{S}^{*}}{\delta r_{U}^{*}}\right|}_{S}}-{{\left| \frac{\delta r_{S}^{*}}{\delta r_{U}^{*}}\right|}_{UN}}>0$, then S and UN converge .

From Eq. (3.9),

$$ S={{\left[\frac{\alpha (1-r_{S}^{*})x+(1-\alpha)(1-r_{U}^{*})y}{\alpha (1-r_{S}^{*})+(1-\alpha)(1-r_{U}^{*})} \right]}^{1-{{r}_{S}}*}}-\left[\frac{{{(x+\delta +z)}^{2-r_{U}^{*}}}-{{(x+\delta -z)}^{2-r_{U}^{*}}}}{2z(2-r_{S}^{*})} \right]=0 $$

(3.23)

and from Eq. (3.13),

$$ UN={{\left[\frac{\alpha (1-r_{S}^{*})x+(1-\alpha)(1-r_{U}^{*})y}{\alpha (1-r_{S}^{*})+(1-\alpha)(1-r_{U}^{*})} \right]}^{1-r_{U}^{*}}}-\left[\frac{{{(y+\delta 1+z1)}^{2-r_{U}^{*}}}-{{(y+\delta 1-z1)}^{2-r_{U}^{*}}}}{2z1(2-r_{U}^{*})} \right]=0. $$

(3.24)

We find two implicit solutions from the above two equations to show that the curves depicting S and UN converge if and only if ${{\left| \frac{\delta r_{S}^{*}}{\delta r_{U}^{*}}\right|}_{S}}>{{\left| \frac{\delta r_{S}^{*}}{\delta r_{U}^{*}}\right|}_{UN}}$.

Accordingly, from (3.23),

$${\left| {\frac{{\delta r_S^*}}{{\delta r_U^*}}} \right|_S} = \frac{{(1 - r_S^*)}}{{(1 - r_U^*)}} + \frac{{{{\rm K}^2}{\rm H}{\Lambda ^{r_S^*}}}}{{2z\alpha (1 - \alpha )(x - y)(1 - r_S^*)(1 - r_U^*){{(2 - r_S^*)}^2}}}$$

(3.25)

where ${\rm K} = \alpha (1 - r_S^*) + (1 - \alpha )(1 - r_U^*)$

$${\rm H} = {(x + \delta + z)^{2 - r_S^*}} - {(x + \delta - z)^{2 - r_S^*}}$$

$$ \Lambda =\frac{\alpha (1-r_{S}^{*})x+(1-\alpha)(1-r_{U}^{*})y}{\alpha (1-r_{S}^{*})+(1-\alpha)(1-r_{U}^{*})}. $$

Again, from (3.24),

$${\left| {\frac{{\delta r_S^*}}{{\delta r_U^*}}} \right|_{UN}} = \frac{{(1 - r_S^*)}}{{(1 - r_U^*)}} + \frac{{{{\rm K}^2}{\rm H}'{\Lambda ^{r_U^*}}}}{{2z1\alpha (1 - \alpha )(x - y){{(1 - r_U^*)}^2}{{(2 - r_S^*)}^2}}}$$

(3.26)

where ${\rm H}' = {(y + \delta 1 + z1)^{2 - r_U^*}} - {(y + \delta 1 - z1)^{2 - r_U^*}}$

Therefore,

$${\left| {\frac{{\delta r_S^*}}{{\delta r_U^*}}} \right|_S} - {\left| {\frac{{\delta r_S^*}}{{\delta r_U^*}}} \right|_{UN}}> 0,\,\,{\rm{iff,}}\,\,\frac{{{{\rm K}^2}}}{{2\alpha (1 - \alpha )(x - y)(1 - r_U^*)}}\left[ {\frac{{H{\Lambda ^{r_S^*}}}}{{z(1 - r_S^*){{(2 - r_S^*)}^2}}} - \frac{{{\rm H}'{\Lambda ^{r_U^*}}}}{{z1(1 - r_U^*){{(2 - r_U^*)}^2}}}} \right]> 0$$

(2.27)

In this case, ${\rm H}> {\rm H}'$, ${{\Lambda }^{r_{S}^{*}}}>{{\Lambda }^{r_{U}^{*}}}$, z > z1, $(1-r_{S}^{*})<(1-r_{U}^{*})$, x > y, and ${{(2-r_{S}^{*})}^{2}}<{{(2-r_{U}^{*})}^{2}}$.

Based on these relations, the above condition as in (2.27) is satisfied. This leads to the convergence of the two curves depicted by S and UN in (Fig. 3.9) QED.

Appendix 3B

Table 3.16 Critical relative risk aversion and mean income for skilled and unskilled natives, when $\delta,~\delta 1$, z, and z1 change

Table 3.17 Critical risk aversion and equilibrium income levels for natives and immigrants, when $\delta$ changes

Table 3.18 Critical relative risk aversion and equilibrium income levels for natives and immigrants, when $\alpha =\beta$ change

Table 3.19 Critical relative risk aversion and equilibrium income levels for natives and immigrants, when $\alpha =\beta$ and a change simultaneously