Presented at (selected): Penn, St. Louis Fed Ph.D. Interns Workshop, SED 2021, UC3M, Dale T. Mortensen Centre Conference, Essex/RHUL/Bristol Junior Search and Matching Workshop, QMUL PhD & Postdoc Workshop, WUSTL Economics Graduate Student Conference.
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How does wealth affect the extent to which the “right” workers are matched with the “right” jobs? Using the NLSY79 and O*NET, we document that wealth-poor workers are more mismatched with their jobs. We develop a model featuring worker and firm heterogeneity, search frictions, and incomplete markets. Workers and firms jointly face a trade-off between the speed and payoff of forming a match. A lack of wealth induces workers to trade off wages for finding a job faster due to precautionary motives, which in turn gives a wider range of firms the incentive to match. We refer to this phenomenon as “precautionary mismatch” and show that it leads to substantial within-type earnings and productivity gaps between the wealth-rich and the wealth-poor, especially among high-skilled workers. We estimate that total output would be 3% higher in the US if all employed workers were allocated to the right jobs. In a quantitative experiment, we find that wealth transfers from incumbent workers to young labor market entrants reduce within-type earnings and productivity inequality, improve sorting, and enhance labor productivity. Most of the productivity increase comes from reduced under-employment of high-skilled workers.