Financial buffers, unemployment duration and replacement labor income

This study examines how the financial buffer of unemployed individuals affects the duration of their unemployment and their replacement income after they find a new position. The analysis is conducted on a highly detailed Swedish dataset that includes information on households' balance sheets. Liquid financial wealth and net wealth both have a positive effect on unemployment duration, which is consistent with the theory that individuals with financial buffers are able to search for new positions for longer periods of time. Moreover, individuals with financial buffers use that extended period of time to search for new positions that offer higher labor income replacement rates.