Working Paper: CEPR ID: DP16547
Authors: Jan Eeckhout; Alireza Sepahsalari
Abstract: We propose a theory that analyzes how a workers' asset holdings affect their job productivity. In a labor market with uninsurable risk, workers choose to direct their job search trading off productivity and wages against unemployment risk. Workers with low asset holdings have a precautionary job search motive, they direct their search to low productivity jobs because those offer a low risk at the cost of low productivity and a low wage. Our main theoretical contribution shows that the presence of consumption smoothing can reconcile the directed search model with negative duration-dependence on wages, a robust empirical regularity that the canonical directed search model cannot rationalize. We calibrate the infinite horizon economy and find this mechanism to be quantitatively important. We evaluate a tax financed unemployment insurance (UI) scheme and analyze how it affects welfare. Aggregate welfare is inverted U-shaped in benefits: the insurance effect UI dominates the incentive effects for low levels of benefits and vice versa for high benefits. In addition, when UI increases, total production falls in the economy while worker productivity increases. Finally, we compare a one-off severance payment with per-period benefits and find th
Keywords: unemployment risk; precautionary savings; precautionary job search; sorting; unemployment insurance; severance pay; directed search; duration dependence
JEL Codes: C6; E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Workers' asset holdings (D14) | Job search behavior (J68) |
| Low asset holdings (D14) | Apply for low productivity jobs (J29) |
| Unemployment risk (J64) | Precautionary job search (J68) |
| Higher asset holders (G19) | Apply for more productive jobs (J24) |
| Higher asset holders (G19) | Lower job finding probabilities (J68) |
| Asset levels (G19) | Job finding probabilities (J68) |
| Unemployment benefits increase (J65) | Worker productivity rises (J29) |
| Unemployment benefits increase (J65) | Total production declines (E23) |
| Higher unemployment benefits (J65) | Improve welfare for low asset workers (I38) |