Self-Insurance in Turbulent Labor Markets

• Authors: Alireza Sepahsalari, Cristiano Mantovani, Ana Figueiredo and Isaac Baley
• BSE Working Paper: 1538 | December 25
• Keywords: Unemployment Insurance , Skill loss , precautionary savings , directed search , turbulence riks , job displacement , self-insurance , precautionary search , job tiers , job-creation subsidies
• JEL codes: D31, E21, E24, J24, J31, J63, J64

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.