Abstract

I present empirical evidence that U.S. workers with low liquid wealth face significantly higher cyclical employment risk. This finding cannot be fully explained by skills, socio-demographics, or past income. I propose a framework that generates a negative correlation between wealth and employment risk in equilibrium, through job sorting based on wealth. Job search provides an insurance mechanism for liquidity constrained and risk-averse unemployed workers. Asset-poor unemployed sort into relatively lower wage and lower security jobs, because these offer a relatively higher job finding probability. I build a quantitative model to study the implications of wealth sorting for wages and job transitions over the business cycle, as well as its consequence for long-term inequalities. The interaction between employment risk and wealth accumulation generates a "poverty trap", which is amplified in bad times. The cost of entering unemployment during a recession amounts to 3% of lifetime consumption for the poorest, more than twice that of the wealthiest.