be lazy. Employers want employees to be able to do more work while getting their reserved wages. Obvious incentives would exist for firms to declare shirking when it has not taken place. In the Lazear model, firms have obvious incentives to fire older workers (paid above marginal product) and hire new cheaper workers, creating a credibility problem. The seriousness of this employer moral hazard depends on the extent to which effort can be monitored by outside auditors, so that firms cannot cheat, although reputation effects (e.g. Lazear 1981) may be able to do the same job. Labor turnover "Labor turnover" refers to rapid changes in the workforce from one position to another. This is determined by the ratio of the size of the labor and the number of employees employed. On the labor turnover flavor of the efficiency wage hypothesis, firms also offer wages in excess of market-clearing (e.g. Salop 1979, Schlicht 1978, Stiglitz 1974), due to the high cost of replacing workers (search, recruitment, training costs). If all firms are identical, one possible equilibrium involves all firms paying a common wage rate above the market-clearing level, with involuntary unemployment serving to diminish turnover. These models can easily be adapted to explain dual labor markets: if low-skill, labor-intensive firms have lower turnover costs (as seems likely), there may be a split between a low-wage, low-effort, high-turnover sector and a high-wage, high effort, low-turnover sector. Again, more sophisticated employment contracts may solve the problem. Selection In selection wage theories it is presupposed that performance on the job depends on "ability", and that workers are heterogeneous with respect to ability. The selection effect of higher wages may come about through self-selection or because firms faced with a larger pool of applicants can increase their hiring standards and thereby obtain a more productive work force. Workers with higher abilities are more likely to earn more wages, and companies are willing to pay higher wages to hire high-quality people as employees. Self-selection (often referred to as adverse selection) comes about if the workers’ ability and reservation wages are positively correlated. There are two crucial assumptions, that firms cannot screen applicants either before or after applying, and that there is costless self-employment available which realises a worker's marginal product (that is higher for the more productive workers). If there are two kinds of firm (low and high wage), then we effectively have two sets of