How Wealth Influences Workers’ Job-Switching Behavior

Each month, approximately 2% of U.S. workers change jobs—a common way for workers to achieve wage growth. Despite the possible financial upside, switching jobs can also be risky: often, it is first in, first out when it comes to layoffs. Workers, therefore, must make a trade-off between the higher wage from a new job and the stability from an existing job.

Workers face diverse labor market outcomes during economic downturns. While extensive research has examined how factors like income, gender, age, race, and education level influence these outcomes, the impact of wealth on workers’ labor market experiences during recessions remains largely unexplored.

A new OFR Staff Discussion Paper, “Labor Market Recoveries Across the Wealth Distribution,” is the first paper to study the macroeconomic effects of wealth through its role on workers’ job-switching behavior. Author Daniele Caratelli argues that differences in job-switching across the wealth distribution contribute to the deeper fall in earnings experienced by low-wealth workers following recessions.

Caratelli identifies and discusses what he calls the precautionary job-keeping motive. He argues that, all else equal, when compared to high-wealth workers, low-wealth workers are not as inclined to switch jobs because they are less willing to take on the greater risk of layoff associated with changing jobs. If low-wealth workers switch jobs and become unemployed, they are forced to significantly reduce consumption. In contrast, high-wealth workers who switch jobs and become unemployed can rely on their savings until they find a new job. This results in low-wealth workers not changing jobs as frequently and, consequently, experiencing lower wage growth relative to their high-wealth peers. The motive has broader implications on the labor market and the economy as a whole.

Caratelli studies the role precautionary job-keeping played during both the Great Recession and the pandemic recession. To do so, Caratelli builds a quantitative model calibrated to U.S. data. In examining the Great Recession, he finds that it did not affect workers equally. Low-wealth workers experienced on average a 10% decline in real labor earnings. In comparison, high-wealth workers experienced only a small and short-lasting drop in earnings. Caratelli finds that the precautionary job-keeping motive explains up to half of the earnings gap between low- and high-wealth workers following the Great Recession. Unlike after the Great Recession, in which the job-switching rate stagnated, the recovery to the Pandemic Recession saw only a small fall in job-switching followed by a fast recovery, a phenomenon called the Great Reallocation.

Notably, the pandemic recession was characterized by large fiscal stimulus that boosted workers’ wealth, especially for those at the bottom of the wealth distribution. As the figure above shows, Caratelli finds that absent the fiscal stimulus (blue line), workers would have switched jobs less compared to the data (gray line). Caratelli argues that the injection of stimulus onto workers’ balance sheets alleviated their precautionary job-keeping motive—with more savings to fall back on, workers felt more comfortable taking on risk and were more willing to switch to new jobs. Unlike previous literature that shows that unemployment benefits affect the jobs the unemployed apply for, this study shows that fiscal stimulus also has a role to play in explaining the job-switching decision of already employed workers.