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Financial frictions and occupational mobility

  • William B. Hawkins
  • Jose Mustre-del-Rio

An important risk faced by individuals is labor income risk associated with changes in demand for an individual’s selected occupation. This risk reflects uncertainty about future income on the current job. As an example, the declining competitiveness of the U.S. automobile or steel sectors are events that are unanticipated from the perspective of a worker, yet have a strong bearing on future labor income for these workers. One way to limit labor income risk is by switching occupations. This, however, is costly because of retraining costs, forgone earnings, and lost occupational specific experience. Hence, understanding when and which workers switch occupations is a non-trivial question. ; This paper examines the decision process through which individuals switch occupations as a way to limit labor income shocks. From a positive standpoint, understanding why and when individuals switch occupations is crucial for understanding the behavior of labor income. From a normative standpoint, if imperfect financial markets hinder occupational mobility, then there is a clear role for monetary policy to improve economic outcomes ; We quantify the importance of financial frictions for occupational mobility and for economic welfare. We consider a world where financial markets are incomplete, occupations receive shocks, and switching occupations is costly for the aforementioned reasons. In our benchmark model we find that occupational mobility is significantly lower than in a world with complete financial markets. This translates into reduced economic welfare for individuals as they cannot efficiently reallocate across occupations. We then assess the impact of policies aimed at increasing occupational mobility. In a simple example, we find that an across the board subsidy to switching occupations increases mobility but not economic welfare.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 12-06.

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Date of creation: 2012
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Handle: RePEc:fip:fedkrw:rwp12-06
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  1. Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2003. "Incomplete Markets, Labor Supply and Capital Accumulation," Working Papers 173, Barcelona Graduate School of Economics.
  2. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
  3. repec:spo:wpecon:info:hdl:2441/8623 is not listed on IDEAS
  4. Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin, 2008. "Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions," NBER Working Papers 13871, National Bureau of Economic Research, Inc.
  5. Pijoan-Mas, Josep, 2005. "Precautionary Savings or Working Longer Hours?," CEPR Discussion Papers 5322, C.E.P.R. Discussion Papers.
  6. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  7. Buera, Francisco J. & Shin, Yongseok, 2011. "Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks," Journal of Economic Theory, Elsevier, vol. 146(3), pages 845-862, May.
  8. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007. "Insurance and Opportunities: A Welfare Analysis of Labor Market Risk," NBER Working Papers 13673, National Bureau of Economic Research, Inc.
  9. Hugo A. Hopenhayn & Galina Vereshchagina, 2003. "Risk Taking by Entrepreneurs," RCER Working Papers 500, University of Rochester - Center for Economic Research (RCER).
  10. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  11. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
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