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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.

Suggested Citation

  • Jeremy Lise, 2013. "On-the-Job Search and Precautionary Savings," Review of Economic Studies, Oxford University Press, vol. 80(3), pages 1086-1113.
  • Handle: RePEc:oup:restud:v:80:y:2013:i:3:p:1086-1113
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    File URL: http://hdl.handle.net/10.1093/restud/rds042
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Paul Gomme & Damba Lkhagvasuren, 2011. "The Cyclicality of Search Intensity in a Competitive Search Model," Working Papers 11003, Concordia University, Department of Economics.
    3. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2016. "Matching, Sorting and Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 63-87, January.
    4. Hornstein, Andreas & Kudlyak, Marianna, 2015. "Estimating Matching Efficiency with Variable Search Effort," Working Paper Series 2016-24, Federal Reserve Bank of San Francisco, revised 06 Dec 2016.
    5. Silvio Rendon & Nuria Quella, 2013. "Behind the Great Recession: Job Search and Housing Decisions," Department of Economics Working Papers 13-03, Stony Brook University, Department of Economics.
    6. Gomme, Paul & Lkhagvasuren, Damba, 2015. "Worker search effort as an amplification mechanism," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 106-122.
    7. 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.
    8. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    9. Haywood, Luke, 2016. "Wealth effects on job preferences," Labour Economics, Elsevier, vol. 38(C), pages 1-11.
    10. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2013. "Mismatch, Sorting and Wages Dynamics," Sciences Po publications info:hdl:2441/32h1padvln8, Sciences Po.
    11. J. Ignacio García-Pérez & Sílvio Rendon, 2016. "Family Job Search and Wealth: The Added Worker Effect Revisited," Working Papers 16.12, Universidad Pablo de Olavide, Department of Economics.
    12. Launov, Andrey & Wälde, Klaus, 2016. "The employment effect of reforming a public employment agency," European Economic Review, Elsevier, vol. 84(C), pages 140-164.
    13. repec:red:issued:16-276 is not listed on IDEAS
    14. Núria Quella & Silvio Rendon, 2014. "The Interaction between Job Search and Housing Decisions," 2014 Meeting Papers 1222, Society for Economic Dynamics.
    15. Jean-Baptiste Michau, 2013. "On the Provision of Insurance Against Search-Induced Wage Fluctuations," Working Papers hal-00850547, HAL.
    16. Etheridge, Ben, 2015. "A test of the household income process using consumption and wealth data," European Economic Review, Elsevier, vol. 78(C), pages 129-157.
    17. Joachim Hubmer, 2018. "The Job Ladder and its Implications for Earnings Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 172-194, July.
    18. Coles, M & Mortensen, DT, 2015. "Stochastic Unemployment with Dynamic Monopsony," Economics Discussion Papers 14457, University of Essex, Department of Economics.
    19. Pei, Yun & Xie, Zoe, 2016. "A Quantitative Theory of Time-Consistent Unemployment Insurance," FRB Atlanta Working Paper 2016-11, Federal Reserve Bank of Atlanta, revised 01 Dec 2017.
    20. Gregor Jarosch, 2014. "Falling off the Ladder - Earnings Losses from Job Loss," 2014 Meeting Papers 1248, Society for Economic Dynamics.
    21. Bowlus, Audra J. & Liu, Huju, 2013. "The contributions of search and human capital to earnings growth over the life cycle," European Economic Review, Elsevier, vol. 64(C), pages 305-331.
    22. Shouyong Shi & Gaston Chaumont, 2017. "Wealth Accumulation, On the Job Search and Inequality," 2017 Meeting Papers 128, Society for Economic Dynamics.
    23. Haywood, Luke, 2016. "Wealth effects on job preferences," Labour Economics, Elsevier, vol. 38(C), pages 1-11.

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