I study how initial wealth affects lifetime earnings inequality when labor markets are frictional. To do this, I construct a model life‐cycle model with search frictions, incomplete markets, and endogenous human capital accumulation. In the model, incomplete markets prevent low‐wealth workers from smoothing consumption, causing them to accept low pay jobs while unemployed. In anticipation, they build savings instead of human capital while employed. This amplifies the importance of initial wealth for life‐cycle inequality. Using this model, I find that differences in initial wealth cause larger differences in lifetime earnings than either initial human capital or ability.
Please refer to published version for the most recent bibliographic citation information. If a published version is known of, the repository item page linked to above, will contain details on accessing it.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.