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On-the-Job Search and Precautionary Savings

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  • Jeremy Lise

Abstract

In this article, I develop and estimate a model of on-the-job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset. I derive the implications for optimal savings behaviour in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on-the-job search. Savings behaviour depends in a very intuitive way on the rate at which offers are received, the rate at which jobs are destroyed, and a worker's current rank in the wage distribution. The implication is that workers, who are identical in terms of preferences and opportunities, have substantially different savings behaviour depending on their history and current position in the wage distribution. The mechanism that generates the substantial differences in savings behaviour in the model is the dynamic of the "wage ladder" resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). The behaviour of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behaviour of workers near the top of the distribution is driven by the possibility of job loss. The distributions of earnings, wealth, and consumption implied by the model (suitably aggregated) align reasonably well with the data, with the notable exception of implying substantially less concentration of wealth among the richest one percent of the population. Copyright 2013, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rds042
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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 3 ()
Pages: 1086-1113

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Handle: RePEc:oup:restud:v:80:y:2013:i:3:p:1086-1113

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Cited by:
  1. Paul Gomme & Damba Lkhagvasuren, 2011. "The Cyclicality of Search Intensity in a Competitive Search Model," Working Papers 11003, Concordia University, Department of Economics.
  2. Jean-Baptiste Michau, 2013. "On the Provision of Insurance Against Search-Induced Wage Fluctuations," Working Papers hal-00850547, HAL.
  3. Peter Cappelli & Monika Hamori, 2013. "Who Says Yes When the Headhunter Calls? Understanding Executive Job Search Behavior," NBER Working Papers 19295, National Bureau of Economic Research, Inc.
  4. Rendon, Silvio & Quella, Núria, 2013. "Behind the Great Recession: Job Search and Housing Decisions," IZA Discussion Papers 7773, Institute for the Study of Labor (IZA).
  5. Jean-Olivier Hairault & François Langot & Thepthida Sopraseuth, 2014. "Why is Old Workers’ Labor Market more Volatile? Unemployment Fluctuations over the Life-Cycle," TEPP Working Paper 2014-03, TEPP.
  6. repec:hal:cesptp:halshs-00972291 is not listed on IDEAS
  7. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2013. "Mismatch, Sorting and Wage Dynamics," Cowles Foundation Discussion Papers 1886, Cowles Foundation for Research in Economics, Yale University.
  8. Luke Haywood, 2014. "Too Rich to Do the Dirty Work?: Wealth Effects on the Demand for Good Jobs," Discussion Papers of DIW Berlin 1355, DIW Berlin, German Institute for Economic Research.
  9. Audra J. Bowlus & Huju Liu, 2012. "The Contributions of Search and Human Capital to Earnings Growth Over the Life Cycle," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20122, University of Western Ontario, CIBC Centre for Human Capital and Productivity.

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