Unequal Job Security, Unemployment Scarring, and the Distribution of Welfare in a Search and Bargaining Model

What the paper says

ABSTRACT What causes unemployment to concentrate among the same workers over time, and what are the welfare consequences? I demonstrate that unemployment scarring emerges naturally in a frictional labor market when firms with lower‐productivity matches have smaller profit margins to absorb negative shocks. I develop a search model with endogenous job termination that reproduces two key empirical regularities: lower‐wage jobs are less stable and previous unemployment predicts future job loss. The model captures a crucial non‐monotonic pattern I document empirically, where termination risk drops sharply in the left tail of the wage distribution but flattens beyond the median wage. This mechanism increases lifetime wage and unemployment inequality by 7% compared to models with uniform termination risk. Counterfactual experiments reveal that unemployment insurance reduces scarring by enabling workers to wait for higher‐quality matches, but simultaneously strengthens workers' bargaining position, which counterintuitively decreases job security at every productivity level.