Self-Insurance in Turbulent Labor Markets

Isaac Baley, Ana Figueiredo, Cristiano Mantovani and Alireza Sepahsalari

No 20918, CEPR Discussion Papers from Centre for Economic Policy Research

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 heterogeneous agent 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.

JEL-codes: D31 E21 E24 J24 J31 J63 J64 (search for similar items in EconPapers)
Date: 2025-12
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