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Why Bother? Understanding the Impact of Financial Obligations on Wage Selectivity

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  • Gibson, John
  • Johnson, David

Abstract

Approximately 80 percent of Americans have a significant financial obligation. A substantial fraction of these individuals rely almost solely on labor income to meet these needs. Using a two-period model we demonstrate that when agents are risk averse, increasing the level of financial obligation will have a differential effect on the likelihood a wage offer is accepted depending on the initial size of the obligation. Increasing financial obligations from low levels is found to reduce wage selectivity, while increasing it beyond a certain threshold reverses this effect. We test our theory using online experiments. We confirm our theoretical results in the form of a statistically significant "dip" in wage selectivity for risk averse subjects assigned moderate financial obligations. This non-monotonic effect suggests that heterogeneity in financial obligations may exacerbate income and wealth inequality through individuals' labor market decisions. Policy makers interested in distributional effects should consider this feedback mechanism when designing policies related to loan forgiveness or debt discharge.

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  • Gibson, John & Johnson, David, 2017. "Why Bother? Understanding the Impact of Financial Obligations on Wage Selectivity," MPRA Paper 78244, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:78244
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    Cited by:

    1. Wright, Nicholas A., 2021. "Need-based financing policies, college decision-making, and labor market behavior: Evidence from Jamaica," Journal of Development Economics, Elsevier, vol. 150(C).
    2. Gibson, John & Johnson, David, 2018. "The Economic Relevancy of Risk Preferences Elicited Online and With Low Stakes," MPRA Paper 87231, University Library of Munich, Germany.

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    More about this item

    Keywords

    Wage Selectivity; Debt; Unemployment; Online Experiment;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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