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

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.