Asset choice, liquidity constraints, labor supply, and unemployment duration

The general purpose is to study the relationship between an individual's financial endowment and his performance in the labor market.;The first chapter discusses the relationship between wealth and labor supply. While a number of theoretical models imply that increases in wealth induce individuals to reduce labor supply, I present empirical evidence suggesting the contrary.;The second chapter contains a model that studies the influence of increased unemployment and income risk on asset choice. The model shows that workers who are more likely to experience unemployment allocate a higher portion of wealth to lower paying liquid assets. They do so in order to avoid liquidity constraints if they had invested all savings in long term assets.;In chapter III, I present a statistical model that attributes the positive association between wealth and labor supply to direct and indirect effects of heterogeneity among workers. Indirect effects of heterogeneity enter through the asset portfolio allocation and liquidity constraints.;The empirical findings indicate that perceived income risk and job instability have a positive effect on the portfolio share of short term assets. The observed portfolio allocation measures individual perception of income stability. When included in equations relating labor supply to asset holdings, this estimated relationship is more consistent with the relationship predicted by economic models.;The models in chapter IV is designed to look at the interaction between wealth, search behavior, and consumption. It also discusses how liquidity considerations affect job search and consumption. The paper provides a dynamic programming model of search-leisure-consumption choice. Liquidity constraints are modelled such that the interest rate is a function of current net assets. The analytical model predicts consumption (search) during unemployment to increase (decrease) with an increase in initial assets. Wealth dependent interest rates reinforce asset effects.;Empirical estimates of unemployment duration confirm the model by suggesting strong positive asset-income, unemployment insurance, and personal transfer-income effects on spell duration. These effects are stronger if no public unemployment subsidies are available. Unsecured debt reflects the evidence of liquidity constraints and shortens unemployment spells.;The empirical estimates of this study are based on the SIPP (Survey of Income and Program Participation) data set.