Abstract
We investigate the welfare consequences of turbulence risk—the risk of skill loss coinciding with involuntary layoffs—on individual and aggregate labor market outcomes. Motivated by new empirical evidence on the link between wealth and labor market outcomes after job loss, we build a tractable dynamic heterogeneous agents model with directed search, imperfect financial markets, and uninsurable persistent labor market risk. We calibrate our model to the US economy, matching new empirical facts on the joint impact of occupational mobility and wealth at the moment of a layoff on re-employment wages and unemployment duration. We use the estimated model to conduct counterfactual experiments. The incidence of shocks matters for the link between risk and wealth inequality. Moreover, we show that the primary mechanism in the paper - wealth-driven occupational reallocation - shapes the sensitivity of macroeconomic aggregates to increases in idiosyncratic level risk.
The seminar will be held in room 1249 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.