Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: We use employer-employee data matched to detailed wealth records for the population of Sweden to study the relationship between initial wealth and labor market outcomes in early careers. Controlling for a detailed array of observable characteristics, including the educational major and parents' earnings before labor market entry, those with higher levels of wealth earn more. The relationship, however, is non-monotonic - the wealthiest and poorest earn less than those in the middle of the initial wealth distribution. We show that the correlation between initial wealth and average earnings in early careers is largely driven by between-firm differences, suggesting an important role for the allocation of workers across firms, and provide some descriptive evidence suggesting parental connections do not play a major role. We document several features of worker flows by parental wealth. We build a search model with on-the-job search, savings, disutility of work and heterogeneity in job destruction to understand these patterns. Providing greater benefits to workers upon labor market entry, taxed through labor income, can significantly increase wages and welfare.

Keywords: earnings inequality; parental wealth; social mobility

JEL-codes: D31; E24; J62; J64

Language: English

44 pages, October 28, 2024

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