Title: Worker replacement
Description: "Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs.  Firms can commit to a wage policy, i.e.  a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables.  However, firms cannot commit to employ workers.  In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires.  The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks"--National Bureau of Economic Research web site.