Unemployment Risk and the Distribution of Assets
How does the distribution of assets affect job search decisions? We analyze unemployed workers and how their asset holdings affect the allocation to jobs of different productivity. In the absence of insurance, workers with low asset holdings direct their search to low productivity jobs because they offer a low wage and low risk. We show that this occurs under a condition closely related to Decreasing Relative Risk Aversion. There is perfect segregation of asset holders into job productivities even when assets holdings are private. We also find that for a given worker, the productivity of jobs she applies for is decreasing in the duration of unemployment. As assets gradually deplete, she takes more secure, low wage jobs. When workers are heterogeneous in skills, there is a trade off between wages and insurance. The skilled but poor worker will necessarily go for the less ambitious, low wage job in order to hedge risk.
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