Events at CERGE-EI

Amalia Repele, Ph.D.

Institute for International Economic Studies (IIES), Stockholm University, Sweden

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Meeting number: 2744 881 1617
Meeting password: 254176

Abstract: I present empirical evidence that US workers with low liquid wealth face significantly more cyclical employment. This finding cannot be fully explained by skills or socio-demographics; liquid wealth itself plays a role. I propose a framework that generates a negative correlation between wealth and employment risk in equilibrium, through job sorting based on wealth. Job search provides an insurance mechanism for liquidity constrained and risk-averse unemployed workers. Wealth-poor unemployed sort into relatively lower wage and lower security jobs, because these jobs offer a relatively higher job finding probability. I build a quantitative model to study the implications of wealth sorting for wages and job transitions over the business cycle, as well as its consequence for long-term inequalities. The interaction between employment risk and wealth accumulation generates a “poverty trap” which is amplified in bad times. The cost of entering unemployment during a recession amounts to 3% of lifetime consumption for the poorest, more than twice that of the wealthiest.