Paper #1931

Title:

Self-insurance in turbulent labor markets

Authors:

Isaac Baley, Ana Figueiredo, Cristiano Mantovani and Alireza Sepahsalari

Date:

December 2025

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.

Keywords:

turbulence riks; job displacement; self-insurance; precautionary savings; precautionary search; directed search; skill loss; job tiers; unemployment insurance; job-creation subsidies.

JEL codes:

D31, E21, E24, J24, J31, J63, J64

Area of Research:

Macroeconomics and International Economics

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