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On-the-Job Search and Precautionary Savings: Theory and Empirics of Earnings and Wealth Inequality

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  • Jeremy Lise

    () (Institute for Fiscal Studies and University College London)

Abstract

I develop and estimate a model of the labor market in which precautionary savings interacts with labour market frictions to produce substantial inequality in wealth among ex ante identical workers. I show that a model of on-the-job search,in which workers are risk averse and markets are incomplete, provides a direct and intuitive link between the empirical earnings and wealth distributions. The mechanism that generates the high degree of wealth inequality 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-thejob search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). The behavior of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behavior of workers near the top of the distribution is driven by the possibility of job loss.

Suggested Citation

  • Jeremy Lise, 2011. "On-the-Job Search and Precautionary Savings: Theory and Empirics of Earnings and Wealth Inequality," IFS Working Papers W11/16, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:11/16
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    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
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    7. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
    8. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, May.
    9. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
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    Cited by:

    1. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1511-1560.
    2. Guler, Bulent & Guvenen, Fatih & Violante, Giovanni L., 2012. "Joint-search theory: New opportunities and new frictions," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 352-369.
    3. Rune Vejlin, 2011. "Optimal Unemployment Insurance: How Important is the Demand Side?," Economics Working Papers 2011-03, Department of Economics and Business Economics, Aarhus University.
    4. Lammers, Marloes, 2014. "The effects of savings on reservation wages and search effort," Labour Economics, Elsevier, vol. 27(C), pages 83-98.
    5. Christian Bayer & Klaus Waelde, 2011. "Describing the Dynamics of Distributions in Search and Matching Models by Fokker-Planck Equations," Working Papers 1110, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 21 Jul 2011.
    6. 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.
    7. Flabbi, Luca & Mabli, James, 2012. "Household Search or Individual Search: Does It Matter? Evidence from Lifetime Inequality Estimates," IZA Discussion Papers 6908, Institute for the Study of Labor (IZA).
    8. L. Arrondel & M. Roger & F. Savignac, 2014. "Wealth and Income in the Euro Area: Heterogeneity in Households’ Behaviours?," Working papers 497, Banque de France.

    More about this item

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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