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Job Search and Savings: Wealth Effects and Duration Dependence

  • Rasmus Lentz

    (Boston University)

  • Torben Tranas

    (Rockwool Foundation Research Unit)

This article studies a risk-averse worker's optimal savings and job search behavior as she moves back and forth between employment and unemployment. We show that job search effort is negatively related to wealth under the assumption of additively separable utility. Consequently, job search exhibits positive unemployment duration dependence because wealth is drawn down to smooth consumption as the spell progresses. Finally, given optimal search, savings still provide imperfect insurance against income fluctuations; precautionary savings are built up during employment spells and run down during unemployment spells, but the consumption path will not be perfectly smooth over states.

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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 23 (2005)
Issue (Month): 3 (July)
Pages: 467-490

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Handle: RePEc:ucp:jlabec:v:23:y:2005:i:3:p:467-490
Contact details of provider: Web page: http://www.journals.uchicago.edu/JOLE/

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  1. van den Berg, G. & van Ours, J.C., 1996. "Unemployment dynamics and duration dependence," Other publications TiSEM 4374742f-8d86-458d-9ab3-6, Tilburg University, School of Economics and Management.
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  7. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
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  9. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
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  11. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  12. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  13. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
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