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Job Search and Savings: Wealth Effects and Duration Dependence

  • Rasmus Lentz
  • Torben Tranaes

In this paper we consider a risk averse worker who is moving back and forth between employment and unemployment; layoffs are random and beyond the worker’s influence, while the re-employment chance is directly affected by search effort. We characterize the worker’s optimal savings and job-search behavior as well as the resulting consumption paths and wealth formation. In general, all decisions will depend on the current level of wealth: First, the choice of search effort increases as wealth decreases, a finding which is in accordance with our empirical duration analysis using micro data on unemployment spells. Second, consumption increases with wealth both when the worker is employed and unemployed. Third, savings provide insurane against income fluctuations but this insurance is not perfect; precautionary savings are built up during employment spells and run down during unemployment spells but the consumption path is never going to be completely smooth over states. Finally, our results suggest that the worker’s search intensity and hence the probability of leaving unemployment will exhibit positive duration dependence over unemployment spells via its inverse relationship with the worker’s wealth.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 461.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ces:ceswps:_461
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  1. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  2. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  3. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  4. Berg, G.J. & Ours, J.C., 1993. "Unemployment dynamics and duration dependence," Serie Research Memoranda 0022, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  5. Browning, M. & Crossley, T., 1999. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," ANU Working Papers in Economics and Econometrics 1999-376, Australian National University, College of Business and Economics, School of Economics.
  6. Kenneth Burdett & Dale T. Mortensen, 1977. "Labor Supply Under Uncertainty," Discussion Papers 297, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
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  9. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
  10. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
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  12. 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.
  13. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  14. repec:oup:qjecon:v:84:y:1970:i:1:p:113-26 is not listed on IDEAS
  15. repec:oup:restud:v:49:y:1982:i:2:p:217-27 is not listed on IDEAS
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