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Financial Frictions and Occupational Mobility

Jose Mustre-del-Rio () and William Hawkins

No 1123, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effects of financial market incompleteness on occupational mobility. Incomplete insurance not only generates an increase in consumption volatility, but also a reduction in occupational mobility and a worsening of occupational matching. The correlation between occupation-level productivity and labor supply is lower than under complete markets. Low-asset workers remain in low-productivity occupations even when the expected value of switching is positive. Negative occupational productivity shocks therefore have larger effects on such workers’ future earnings than they would for better insured workers. In a calibrated model, we find that the welfare costs of market incompleteness can be as large as 25 percent of lifetime consumption.

Date: 2012
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