Francois Fontaine (Paris School of Economics)

Wealth, portfolios, and unemployment duration (joint with Janne Nyborg Jensen and Rune Vejlin)

Abstract: 

We use administrative data on individual balance sheets in Denmark to document how an individual's financial position affects job search behavior. We look at the effect of wealth at the entry into unemployment on the exit rate from unemployment, as well as the effect on the subsequent job stability. We show that if the distinction between liquid and illiquid net wealth is important, the decomposition of wealth between asset and liabilities is key to measure the effect of liquidity on job search behaviors. We show that liquid assets reduce the probability of becoming re-employed, but we do not see an effect of liquid liabilities or the illiquid wealth components, while interest payments speed up re-employment. We show that these stylized facts can be rationalized by a job search model where individuals can simultaneously save and borrow and where we make the distinction between the stock of liabilities and the stock of assets. In this model,  greater indebtedness, by lowering net wealth, damages the ability to borrow in employment and thus lowers the consumption level during the first periods of re-employment. This lowers the return of job search and thus the search intensity.