Inequality Under Frictional Labour Markets

This thesis studies the emergence of, and the interaction between, inequality in earnings and inequality in wealth, when labour markets are frictional. Chapter 1 investigates the implications of search frictions and human-capital accumulation for the equilibrium distribution of wages when firms invest optimally in match-specific productivity. Optimal investment choice is incorporated in a framework along the lines of (Burdett et al., 2011) and equilibrium is characterised. The effect of the rate of human capital accumulation on equilibrium dispersion of firm productivities and wages is analysed in a numerically solved version of the model. Chapter 2 studies the empirical relationship between wealth and two labour market outcomes - re-employment wages and unemployment durations. The analysis complements a closely related literature by exploiting new data from the Survey of Income and Program Participation. As in prior studies, negative relationship between net worth and hazard rates to employment is documented. In disagreement with prior studies, the relationship between re-employment wages and net worth is found to be non-monotonic and it is argued that prior findings likely result from misspecification. The implications of the relationship serve as a motivation for the third chapter. Chapter 3 (joint with Melvyn Coles) presents a model of the consumption-leisure tradeoff for risk-averse workers when labour markets are frictional. Optimal behaviour is that of a life-cycle consumer - work when young and save for retirement (non-participation) later - planning retirement efficiently. The analysis has highly tractable implications for wealth dynamics which emphasise life-cycle motives, labour-market decisions, persistent differentials in ability and heterogeneity in initial wealth. The model's empirical relevance is assessed; it is demonstrated that it provides an empirically convincing explanation for much of the between-households inequality in wealth.