Employment Stability, Earnings Dynamics, and Life-Cycle Savings

Abstract:

Labor markets are characterized by large heterogeneity in employment stability: some workers hold stable, lifetime jobs, while others cycle frequently in and out of employment. This heterogeneity will shape the earnings dynamics and savings behavior of workers. Yet, how much and in what way remains a largely unexplored question. We fill this gap with an empirical and a quantitative theory answer. We first document two new empirical facts: (1) workers with more stable employment experience faster earnings growth and (2) accumulate more wealth per dollar of income. Second, we develop a life-cycle model that combines a labor market search model with an incomplete markets model of saving behavior. We use the model to interpret the empirical facts, to establish a causal link from employment stability to wealth accumulation, and to quantify the drivers of the underlying mechanism.

Our results support an important role of employment stability heterogeneity in accounting for differences in wealth accumulation.