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Self-insurance in turbulent labor markets

Author

Listed:
  • Isaac Baley

  • Ana Figueiredo
  • Cristiano Mantovani
  • Alireza Sepahsalari

Abstract

We study how wealth shapes workers’ outcomes in turbulent labor markets, where job displacement exposes workers to the risk of skill loss. We develop and quantify a heterogeneousagent directed search model with incomplete markets, skill dynamics, and job “tiers” with distinct risk–return profiles. Workers self-insure against separation and turbulence risks through savings and search decisions, both within and across tiers, generating post-separation outcomes that vary sharply with wealth. In U.S. data, poor workers face the most significant and most persistent wage losses, driven by wealth-induced downgrades into low-tier jobs. Policy experiments reveal clear trade-offs: unemployment insurance improves welfare, while job-creation subsidies more effectively expand output.

Suggested Citation

  • Isaac Baley & Ana Figueiredo & Cristiano Mantovani & Alireza Sepahsalari, 2025. "Self-insurance in turbulent labor markets," Economics Working Papers 1931, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1931
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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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