On-the-Job Search and Precautionary Savings: Theory and Empirics of Earnings and Wealth Inequality
In this paper, I develop and estimate a model of the labor market that can account for both the inequality in earnings and the much larger inequality in wealth observed in the data. I show that an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, 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-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). This feature of the model generates differential savings behavior at different points in the earnings distribution. The wage growth expected by low wage workers, combined with the fact that their earnings are not much higher than unemployment benefits, causes them to dis-save. As a worker's wage increases, the incentive to save increases: the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss. The fact that high wage and low wage workers have such different savings behavior generates an equilibrium wealth distribution that is much more unequal than the equilibrium wage distribution. I estimate the structural parameters of the model by simulation-based methods using the 1979 youth cohort of the NLSY. The estimates indicate that the micro-level search and savings behavior---estimated from the dynamics of individuals' labor market histories and wealth accumulation decisions---aggregates to replicate the cross-sectional inequality in earnings and wealth for this cohort.
|Date of creation:||03 Dec 2006|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, July.
- McFadden, Daniel, 1989.
"A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration,"
Econometric Society, vol. 57(5), pages 995-1026, September.
- Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
- Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
- Sule Alan & Martin Browning, 2003. "Estimating Intertemporal Allocation Parameters using Simulated Residual Estimation," CAM Working Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
- David Andolfatto, 2002. "A Theory of Inalienable Property Rights," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 382-393, April.
- David Andolfatto, 1999. "A Theory of Inalienable Property Rights," Working Papers 99004, University of Waterloo, Department of Economics, revised Nov 1999.
- David Andolfatto, 2000. "A Theory of Inalienable Property Rights," Cahiers de recherche CREFE / CREFE Working Papers 110, CREFE, Université du Québec à Montréal.
- Mark Bils & Yongsung Chang & Sun-Bin Kim, 2011. "Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 128-154, January.
- 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.
- 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, 05.
- 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. Full references (including those not matched with items on IDEAS)