Revise and Resubmit, American Economic Journal: Macroeconomics
This paper studies how the wealth accumulation of workers and their job search behavior influence firm wage setting. I incorporate wealth accumulation and endogenous search intensity of risk-averse workers into an equilibrium job-ladder model. The wage-sensitive search of wealth-poor workers restrains wage markdowns near the bottom of the job ladder. Removing this discipline through complete markets allows low-wage firms to further push down wages, lowering the average wage and raising wage inequality. This firm-side response, which I call the insurance channel, offsets the direct consumption-smoothing gain of unemployment insurance.
JEL Classification: J30, E21, E24, D83
Keywords: Wage; Saving; Search; Unemployment; Unemployment Insurance