This article studies the impact of raiding opportunities in a labor market in which worker abilities differ. Recruiting firms can either raid an elsewhere‐employed worker of known ability by bidding up his wage or go through costly search to find a good worker among the unemployed. In equilibrium, all types of workers experience unemployment, high‐ability workers involuntarily. The raiding opportunities give rise to involuntary unemployment without changing the basic properties of the competitive model and thus suggest new implications of various institutional parameters on unemployment, in particular, unemployment compensation, minimum wages, wage taxation, and search requirements.

This article studies a risk‐averse worker’s optimal savings and job search behavior as she moves back and forth between employment and unemployment. We show that job search effort is negatively related to wealth under the assumption of additively separable utility. Consequently, job search exhibits positive unemployment duration dependence because wealth is drawn down to smooth consumption as the spell progresses. Finally, given optimal search, savings still provide imperfect insurance against income fluctuations; precautionary savings are built up during employment spells and run down during unemployment spells, but the consumption path will not be perfectly smooth over states.