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Job Search and Savings: Wealth Effects and Duration Dependence

  • Rasmus Lenz
  • Torben Tranæs

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 influcence, 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 insurance 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 Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 01-10.

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Handle: RePEc:kud:epruwp:01-10
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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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  14. J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
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  17. Martin Browning & Thomas F. Crossley, 2000. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," Econometric Society World Congress 2000 Contributed Papers 0386, Econometric Society.
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  20. repec:spo:wpecon:info:hdl:2441/9704 is not listed on IDEAS
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