Equilibrium Wage and Dismissal Processes

I develop and estimate an equilibrium model of the labor market in which inefficient employees are systematically eliminated from the sector of the market characterized by asymmetric information and moral hazard. Systematic selection on the distribution of productivity characteristics produces wage sequences that are increasing in tenure for employees never previously terminated even in the absence of long-term contracting between employees and individual firms. I provide sufficient conditions for there to exist a unique termination-contract type of equilibrium, and I estimate the equilibrium model using microlevel data from the National Longitudinal Survey of Youth panel.