On-the-job search and precautionary savings

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Abstract

In this article, I develop and estimate a model of on-the-job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset. I derive the implications for optimal savings behaviour in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on-the-job search. Savings behaviour depends in a very intuitive way on the rate at which offers are received, the rate at which jobs are destroyed, and a worker's current rank in the wage distribution. The implication is that workers, who are identical in terms of preferences and opportunities, have substantially different savings behaviour depending on their history and current position in the wage distribution. The mechanism that generates the substantial differences in savings behaviour 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 offthe ladder). The behaviour of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behaviour of workers near the top of the distribution is driven by the possibility of job loss. The distributions of earnings, wealth, and consumption implied by the model (suitably aggregated) align reasonably well with the data, with the notable exception of implying substantially less concentration of wealth among the richest one percent of the population

Original languageEnglish (US)
Pages (from-to)1086-1113
Number of pages28
JournalReview of Economic Studies
Volume80
Issue number3
DOIs
StatePublished - Jul 2013

Bibliographical note

Funding Information:
Acknowledgments. This work has benefited greatly from discussions with seminar participants at the following universities and conferences: Amsterdam, UBC, Cambridge, Essex, Georgetown, Mannheim, Marseilles, Minnesota, NYU, Paris 1, U Penn, Penn State, Queen’s, Rochester, Simon Fraser, UCL, Western Ontario, Wisconsin, Yale, Zurich, the Cleveland and Richmond Feds, the ECB, the 2006 SED meetings, and the 2006 NBER Economic Fluctuations summer meetings. I am particularly grateful to Richard Blundell, Tom Crossley, Chris Ferrall, Allen Head, Jean-François Houde, Susumu Imai, Ken Judd, Ashley Kurtz, Guy Laroque, James MacKinnon, Costas Meghir, Krishna Pendakur, Fabien Postel-Vinay, Jean-Marc Robin, Shannon Seitz, Katsumi Shimotsu, Kjetil Storesletten, Randy Wright, and to three anonymous referees for questions and comments that have certainly improved the paper. Financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC) is appreciated.

Keywords

  • Distribution
  • On-the-job search
  • Savings
  • Wealth

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