Selective Hiring and Welfare Analysis in Labor Market Models

Firms select not only how many, but also which workers to hire. Yet, in standard searchmodels of the labor market, all workers have the same probability of being hired. We arguethat selective hiring crucially affects welfare analysis. Our model is isomorphic to a searchmodel under random hiring but allows for selective hiring. With selective hiring, the positivepredictions of the model change very little, but the welfare costs of unemployment are muchlarger because unemployment risk is distributed unequally across workers. As a result,optimal unemployment insurance may be higher and welfare is lower if hiring is selective....