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Labor Market Liquidity

Author

Listed:
  • Jan Eeckhout

    (University College London and Barcelona)

  • Korie Amberger

    (UPF and Barcelona GSE)

Abstract

Labor market liquidity (flows to and from employment) have decreased sharply in the US in the last decades while the unemployment rate has remained constant; and across developed economies, there are also huge differences in flows. This poses very different risk profiles for workers: low labor market liquidity makes employment more attractive (higher job security) and unemployment less so (lower reemployment security). In this paper we ask which regime offers better insurance and higher welfare: job security or reemployment security? Except for very high levels of labor market liquidity, we find that welfare for a given asset level is increasing in liquidity for both the unemployed and employed. To avoid being borrowing constrained in an illiquid labor market, unemployed workers dissave more slowly, and the employed increase their savings, whose value is affected by equilibrium prices (wages and the interest rate). However, allowing capital markets to readjust generates higher aggregate welfare as flows decrease, completely through improved job security and asset accumulation for the low-skilled employed. The aggregate welfare gains from lower liquidity are sizable, 1.4% of consumption when comparing across countries. Optimal Unemployment Insurance (UI) is around 40% in the benchmark US economy and is increasing with lower labor market liquidity. A skill-specific optimal policy heavily favors the less wealthy low skilled but less so in a more illiquid labor market. Finally, we find lower flows decrease wealth inequality.

Suggested Citation

  • Jan Eeckhout & Korie Amberger, 2017. "Labor Market Liquidity," 2017 Meeting Papers 839, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:839
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_839.pdf
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    References listed on IDEAS

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    1. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2005. "A Positive Theory Of Geographic Mobility And Social Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 263-303, February.
    2. Emmanuel Saez & Gabriel Zucman, 2016. "Editor's Choice Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data," The Quarterly Journal of Economics, Oxford University Press, vol. 131(2), pages 519-578.
    3. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    4. Enchuan Shao & Pedro Silos, 2007. "Uninsurable individual risk and the cyclical behavior of unemployment and vacancies," FRB Atlanta Working Paper 2007-05, Federal Reserve Bank of Atlanta.
    5. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    6. Tomaz Cajner & Isabel Cairo, 2011. "Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability," 2011 Meeting Papers 1145, Society for Economic Dynamics.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor Market Liquidity
      by Christian Zimmermann in NEP-DGE blog on 2017-11-11 03:16:40

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