A Search-Theoretic Explanation for the Negative Correlation between Labor Income and Impatience

Abstract

Lawrance (1991) has shown, through the estimation of consumption Euler equations, that subjective rates of impatience (time preference) in the U.S. are three to five percentage points higher for house holds with lower average labor incomes than for those with higher labor income. From a theoretical perspective, the sign of this correlation in a job-search model seems at first to be undetermined, since more impatient workers tend to accept wage offers that less impatient workers would not, thereby remaining less time unemployed. The main result of this paper is showing that, regardless of the existence of effects of opposite sign, and independently of the particular specifications of the givens of the model, less impatient workers always end up, in the long run, with a higher average income. The result is based on the (unique) invariant Markov distribution of wages associated with the dynamic optimization problem solved by the consumers. An example is provided to illustrate the method.