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The Effect of Wealth on Worker Productivity

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  • Eeckhout, Jan
  • Sepahsalari, Alireza

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

Suggested Citation

  • Eeckhout, Jan & Sepahsalari, Alireza, 2021. "The Effect of Wealth on Worker Productivity," CEPR Discussion Papers 16547, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:16547
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Effect of Wealth on Worker Productivity
      by Christian Zimmermann in NEP-DGE blog on 2020-11-06 18:29:43

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    Cited by:

    1. Jerez, Belén, 2022. "Competitive search with two-sided risk aversion," UC3M Working papers. Economics 34383, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Díaz, Antonia & Jerez, Belén & Rincón-Zapatero, Juan Pablo, 2019. "Housing Prices and Credit Constraints in Competitive Search," UC3M Working papers. Economics 28874, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Chaumont, Gaston & Shi, Shouyong, 2022. "Wealth accumulation, on-the-job search and inequality," Journal of Monetary Economics, Elsevier, vol. 128(C), pages 51-71.

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    More about this item

    Keywords

    directed search; Duration Dependence; Precautionary Job Search; precautionary savings; Severance pay; sorting; Unemployment insurance; unemployment risk;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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