A THEORETICAL AND EMPIRICAL INVESTIGATION OF THE IMPACT OF LIQUIDITY ON JOB SEARCH STRATEGY
Abstract
Traditionally, economic theory has focused on behavior in competitive markets under conditions of perfect information. However, in the last two decades many economists have questioned the assumption that complete information is freely available to all economic agents. An alternative hypothesis, which asserts that information is an endogenously determined investment good, has received wide acceptance, because it is capable of explaining observable economic phenomena such as unemployed resources and price variation among homogeneous goods. There is now a well developed theory of labor market behavior which incorporates the recent insight that information is an endogenously determined investment good. Extensions of the basic models are still needed to increase the realism of the model in order to increase its effectiveness as a guide to public labor market strategies designed to minimize the welfare loss associated with unemployment. The purpose of this study is to offer one such extension and to test its implications and assumptions. Typical models dealing with the labor market information investment decision have focused on the expectations concerning the stream of future benefits. These models have failed to consider the imperfections in the capital market which restrict the ability of the average individual to borrow on the basis of his human capital collateral in order to finance current consumption expenditures during periods of unemployed search. This model suggests that current liquidity should be incorporated into the theoretic analysis of job search behavior. Such a model is more consistent with institutional realities. In addition, it offers a new explanation for the existence of on-the-job search as well as a means of identifying those individuals who will engage in search while employed. Tests of the model are performed using a unique data set developed by the Bureau of Labor Statistics from a survey of unemployed workers conducted in May 1976. These tests indicate that several liquidity factors do have a statistically significant impact on the reservation wage of currently unemployed labor force participants. Moreover, some liquidity factors retain their statistical significance when the respondent's last wage is included among the explanatory variables. In summary, the data are consistent with the hypothesis that there is a positive correlation between the reservation wage and the level of liquidity.
Degree
Ph.D.
Subject Area
Economic theory
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