Wealth Accumulation, On-the-Job Search and Inequality

Abstract

We study a directed search equilibrium with risk-averse workers who can search on the job and accumulate non-contingent assets under a borrowing limit. Search outcomes affect earnings and wealth accumulation. In turn, wealth and earnings affect search decisions by changing the optimal trade-off between the wage and the matching probability. The calibrated model yields sizable inequality in wages and wealth among homogeneous workers. Wealth significantly reduces a worker's transition rates from unemployment to employment and from one job to another. The interaction between search and wealth provides important self-insurance as it reduces the pass-through of earnings inequality into consumption by more than 60%. Moreover, we analyze the dynamic welfare effects of changes in unemployment insurance and find that unemployment benefits should be smaller than they currently are.

Keywords: Wealth accumulation, On-the-job search, Inequality, Directed search

JEL Classification: E21, E24, J60