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Wealth inequality and employment fluctuations

Enchuan Shao and Pedro Silos ()

Economic Modelling, 2017, vol. 67, issue C, 125-135

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 (search for similar items in EconPapers)
JEL-codes: E24 E32 D52 (search for similar items in EconPapers)
Date: 2017
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