Cautious Careers: Job Mobility Under Incomplete Markets

Job mobility is risky, workers are risk averse, and insurance markets are incomplete. This paper studies how these features curb and distort job-to-job transitions by making workers excessively cautious, placing too much weight on job safety over wage and productivity gains. We demonstrate this tradeoff by eliciting employed workers’ wage-safety indifference curves in a custom, representative survey. On average, employed U.S. workers require a 1.63 percent pay raise to accept each additional percentage point of annual unemployment risk in a new job. We assess the macroeconomic consequences of our mechanism by embedding it into a general equilibrium search model. Jobs differ in both wages (productivity) and unemployment risk, and risk-averse workers self-insure against unemployment risk through a non-state-contingent bond while searching on and off the job. We find that a complete markets counterfactual would boost job mobility by 12 percent and productivity by 0.19 percent. We also highlight a new role for unemployment insurance—encouraging employed workers to accept risky but high-productivity offers, thereby increasing productivity (by 1.3 percent) and job creation, as well as job loss and unemployment.