Precautionary on-the-job search

Abstract

This paper considers precautionary on-the-job search. I document a body of evidence on precautionary on-the-job search across countries, how such search changes prior to a self defined layoff, and the implications for job mobility, notice periods, and earnings dynamics following job separations. I build a model embedding a notion of precautionary on-the-job search, defined as search in response to a perceived decline in job security. I show that the model can generate several features of the data, including the changes in search and beliefs before job loss, and the differential earnings dynamics for workers who report to lose their job but transition directly to new employers relative to those who become unemployed. Information over insecurity entails large welfare gains concentrated among those at the borrowing constraint. Unemployment insurance programs such as severance payments crowd out precautionary on-the-job search, increasing unemployment incidence, and altering optimal policy.

Keywords: Job loss, search, unemployment, anticipation, risk

JEL Classification: E21, E24, J63, J64, J65