Events at CERGE-EI

Piotr Denderski, Ph.D.

University of Leicester, United Kingdom

Authors: Piotr Denderski, Alex Clymo, Laura A. Harvey

Abstract: Using worker-level panel data we document that current wealth predicts the probability that a worker transitions from employment to non-employment. We find a surprising U-shaped pattern: Low-wealth workers face higher probability than the median worker, but so do the high-wealth workers. This result is robust to a battery of controls and suggests that wealth feeds back into the income process, creating a novel interaction between wealth and income inequalities. We extend the standard incomplete markets model a la Aiyagari-Bewley-Huggett to include search frictions and jobs with heterogeneous unemployment risk and show that it can replicate our findings because i) low wealth workers optimally accept higher risk jobs in order to leave unemployment faster, and ii) high wealth workers voluntarily quit to enjoy more leisure. Accounting for the non-trivial interactions between wealth and non-employment matters for the quantification of the precautionary savings motive, wealth distribution, and wealth mobility.

JEL Classification: E21, J64
Keywords: incomplete markets, job search, unemployment risk, inequality

Full Text: Wealth, Quits and Layoffs