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Barcelona GSE Working Paper No. 670

Title: Search and Matching in the Labor Market without Unemployment Insurance
Authors: Francesc Obiols
Date: 26-11-2012
Keywords: search, incomplete markets, general equilibrium
JEL Codes: D52, D58, J22
We study the effect of market incompleteness in a search model of the labor market in which the distribution of idiosyncratic uncertainty is determined endogenously. We show that costly search introduces a wealth effect at low levels of wealth such that poor agents may find optimal not to look for a job. The combination of this effect with the usual one at higher wealth levels implies that in the long run equilibrium all agents remain out of the labor force and thus there is no production. This equilibrium is at odds with the one obtained under complete markets, and with the one obtained in other incomplete markets assuming that idiosyncratic uncertainty is "policy invariant" (or invariant to the market arrangement). We finally use numerical methods to obtain quantitative predictions in a version of the model in which only rich agents may choose not to search. The effect of the market arrangement remains dramatically large.
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