Assistant Professor in School of Economics at University of Bristol and a scholar at Centre for Macroeconomics
We propose a theory that analyzes how a workers’ asset holdings affect their job productivity. In a labor market with uninsurable risk, workers choose to direct their search to jobs that trade off productivity and wages against unemployment risk. Workers with low asset holdings have a precautionary job search motive, they direct their search to low productivity jobs because those offer a low risk at the cost of low productivity and a low wage. We show that such sorting occurs under a condition closely related to Decreasing Absolute Risk Aversion and that the presence of consumption smoothing can reconcile the directed search model with negative duration dependence on wages, a robust empirical regularity that the canonical directed search model cannot rationalize. We calibrate the infinite horizon economy and find that this mechanism is quantitatively important. We evaluate a tax financed unemployment insurance (UI) scheme and how it affects welfare. Aggregate welfare is inverted U-shaped in benefits: the insurance effect UI dominates the incentive effects for low levels of benefits and vice versa for high benefits. Also, when UI increases, total production falls in the economy while worker productivity increases. Finally, we compare a one-off severance payment with per period benefits and find that per period benefits generate superior welfare.
Alireza Sepahsalari is an assistant professor of economics at University of Bristol, UK. He received his PhD in Economics from University College London (UCL) in 2016. In his dissertation, he studied the labour market consequences of financial frictions. In his current research, he focuses on the impact of financial imperfections on job finding decision of workers as well as firms’ job creation by developing dynamic stochastic general equilibrium models (DSGE).