Employment Stability, Earnings Dynamics, and Life-Cycle Savings

Abstract:

Labor markets are characterized by large heterogeneity in employment stability. Some workers hold lifetime jobs, whereas others cycle repeatedly in and out of employment. This paper explores the economic consequences of such heterogeneity. Using data from the Panel Study of Income Dynamics (PSID), we document a systematic positive relationship between employment stability, earnings growth, and wealth accumulation. Workers with more stable employment have higher earnings growth, and per dollar of income, they accumulate more wealth. We develop a life-cycle consumption-saving model with heterogeneity in job stability that is jointly consistent with empirical labor market mobility, earnings, and wealth dynamics. Using the structural model, we explore the consequences of heterogeneity in employment stability at the individual and macroeconomic level. We conclude that heterogeneity in employment stability is an important but so far largely ignored determinant of heterogeneity in savings behavior and wealth accumulation.