Wealth Accumulation, on the Job Search and Inequality

Abstract

To study the equilibrium interactions between wealth accumulation and labor market search, this paper constructs a model where individuals can accumulate non-contingent assets under a borrowing limit, all workers can search for jobs, and search is directed. On-the-job search generates a wage ladder, which affects inequalities in earnings, wealth and consumption. Employed workers have incentive to save as a precaution for exogenous separation into unemployment. In the reverse direction, wealth and earnings affect search decisions by changing the optimal tradeoff between the wage and the matching probability. The calibrated model reveals that wealth significantly reduces a worker's transition rate from unemployment to employment and from one job to another. Moreover, search frictions increase wealth inequality significantly by increasing the mass of wealthy individuals and lengthening the right tail of the wealth distribution. However, the effect of wealth on job search widens frictional wage dispersion by only a small amount. In addition, on-the-job search is important for frictional wage dispersion.