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Job Search and Savings: Wealth Effects and Duration Dependence

Author

Listed:
  • Rasmus Lentz

    (Boston University)

  • Torben Tranæs

    (Rockwool Foundation Research Unit, Copenhagen)

Abstract

In this paper we study a risk averse worker's optimal savings and job-search behavior as she moves back and forth between employment and unemployment. Recent empirical findings suggest a negative association between a risk averse worker's search effort and wealth. We show that additively separable utility and bounded wealth imply that job search is negatively affected by wealth, and characterize the worker's consumption paths and wealth formation under these conditions. In general, all decisions will depend on the current level of wealth. Furthermore, 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 is never going to be completely smooth over states. Finally, our results suggests that wealth introduces an element of positive duration dependence to the probability of leaving unemployment.

Suggested Citation

  • Rasmus Lentz & Torben Tranæs, 2002. "Job Search and Savings: Wealth Effects and Duration Dependence," CAM Working Papers 2004-11, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2003.
  • Handle: RePEc:kud:kuieca:2004_11
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    File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2004-11.pdf/
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Search; Consumption Smoothing; Duration Dependence;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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