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Borrowing Constraints, Search, and Life-Cycle Inequality

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  • Benjamin Griffy

Abstract

This paper quantifies the impact of borrowing constraints on consumption and earnings inequality in a life-cycle model with labor market search and endogenous human capital accumulation. I first show that following an unemployment spell, likely-constrained workers in the Survey of Income and Program Participation match to jobs that pay more per quarter when they receive an increase in their unemployment insurance. I then construct a life-cycle model with risk averse workers who face borrowing constraints, accumulate human capital endogenously, and search both on and off the job. I use indirect inference to estimate the model parameters, and show that wealth inequality causes both placement into lower-paying jobs as well as slower human capital accumulation when workers face borrowing constraints. Unemployment risk is partially responsible for this change in human capital accumulation. I compare changes in initial conditions and find that a standard deviation decrease in initial wealth causes a larger decline in life-cycle consumption than a standard deviation decrease in initial human capital.

Suggested Citation

  • Benjamin Griffy, 2018. "Borrowing Constraints, Search, and Life-Cycle Inequality," Discussion Papers 18-01, University at Albany, SUNY, Department of Economics.
  • Handle: RePEc:nya:albaec:18-01
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    File URL: http://www.albany.edu/economics/research/workingp/2018/Griffy_JMP.pdf
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    References listed on IDEAS

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    Cited by:

    1. Benjamin Griffy & Stanislav Rabinovich, 2019. "What Do Worker Flows Say about the Wage Gains from Unemployment Insurance?," 2019 Meeting Papers 1270, Society for Economic Dynamics.

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