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Wealth inequality and employment fluctuations |
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| Institution: | 1. U.C. Berkeley, USA;2. Carleton University, Canada;1. Shih Hsin University, Taipei, Taiwan;2. National Chengchi University, Taipei, Taiwan;3. Soochow University, Taipei, Taiwan;1. University Paris Ouest Nanterre La Défense and EconomiX - UMR CNRS 7235, 200 Av. de la République, 92001 Nanterre, France;2. University of Lorraine and BETA - UMR CNRS 7522, Ile du Saulcy, BP 80794, 57012 Metz cedex 1, France;1. Gebze Technical University, Department of Economics, P.K.:141, 41400 Gebze, Kocaeli, Turkey;2. Sabanci University, Faculty of Arts and Social Sciences, Orhanli/Tuzla, 34956 Istanbul, Turkey |
| Abstract: | This paper is concerned with the business cycle dynamics in search and matching models of the labor market when agents are ex-post heterogeneous. We focus on heterogeneity caused by different labor market histories and the resulting wealth inequality they generate. We show that this inequality implies wage rigidity relative to a complete insurance economy. The fraction of wealth poor agents prevents real wages from falling too much in recessions, since small decreases in income imply large losses in utility. Analogously, wages rise less during expansions than in models with homogeneous workers as small increases are enough for poor workers to accept job offers. This mechanism reduces the volatility of wages but generates more volatile employment levels. |
| Keywords: | Wealth inequality Labor search and matching Business cycles Heterogeneous agents Uninsurable risks |
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