With the curtailment of social security systems in most countries, individuals have to rely more and more on their individual savings. In particular, the well known aging of society is a problem that puts more and more pressure on the welfare state. As individuals see governmental generosity decline, it becomes vital to accrue wealth themselves, for example in order to save up for early retirement, or to overcome a spell of unemployment. Vice versa, since individuals have become more wealthy over the years, the government has the opportunity to decrease (unemployment) benefit levels, thereby also making individuals more dependent on their own resources. It is therefore of increasing importance to allow for effects of savings in (theoretical and empirical) models of the labour market. However, being one of the main strands of literature in studies of the labour market, job search models usually fail to take the savings decision into account. In a standard job search model there is no need for savings since individuals are assumed to maximize income, which implies workers to be risk neutral. If instead, as is standard in virtually all other fields in macro and microeconomics, it is assumed that risk averse individuals try to smooth consumption over their lifespan, savings do become an essential part of the job search model.
Danforth (1979) was the first to consider the effect of a savings decision in a model where a utility maximizing agent engages in costly search. He showed that in the case of a DARA utility function, rich individuals will have higher reservation wages, thereby decreasing the probability that they will be employed the next period. Recently, there have been some advances in studies of search that include a savings decision.
These models either focus on the effect of assets on reservation wages (Berloffa and Simmons (2003), Blundell et. al (1997), Rendon (2006)), or they abstract from a reservation wage decision and focus on the choice of search effort only (Lentz and Tranaes, 2005). In the last case, the negative effect of wealth on the probability to transit to employment is driven by a decreased willingness to search. Mortensen (1986), although not directly focusing on the wealth employment transition question, shows that reservation wages decline with time spent in unemployment, as a liquidity constraint becomes more binding. Moreover, in a model without a liquidity constraint but with endogenous search, Mortensen (1986) shows that an increase in the reservation wage decreases search effort.
In this paper, I first construct a theoretical model that describes the relations among wealth, search, and reservation wages. The model makes it possibile to disentangle the various effects of savings on reservation wages and search intensity: wealth affects reservation wages positively, and search effort negatively. Moreover, reservation wages are predicted to have a negative impact on search intensity, such that there is also an indirect negative effect of wealth on the willingness to search.
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The effects of savings on reservation wages and search effort
