Abstract
AbstractI study how initial wealth affects lifetime earnings inequality when labor markets are frictional. To do this, I construct a model life‐cycle model with search frictions, incomplete markets, and endogenous human capital accumulation. In the model, incomplete markets prevent low‐wealth workers from smoothing consumption, causing them to accept low pay jobs while unemployed. In anticipation, they build savings instead of human capital while employed. This amplifies the importance of initial wealth for life‐cycle inequality. Using this model, I find that differences in initial wealth cause larger differences in lifetime earnings than either initial human capital or ability.
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