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Financial frictions and occupational mobility

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  • William B. Hawkins
  • Jose Mustre-del-Rio

Abstract

An important risk faced by individuals is labor income risk associated with changes in demand for an individual?s selected occupation. This risk reflects uncertainty about future income on the current job. As an example, the declining competitiveness of the U.S. automobile or steel sectors are events that are unanticipated from the perspective of a worker, yet have a strong bearing on future labor income for these workers. One way to limit labor income risk is by switching occupations. This, however, is costly because of retraining costs, forgone earnings, and lost occupational specific experience. Hence, understanding when and which workers switch occupations is a non-trivial question. ; This paper examines the decision process through which individuals switch occupations as a way to limit labor income shocks. From a positive standpoint, understanding why and when individuals switch occupations is crucial for understanding the behavior of labor income. From a normative standpoint, if imperfect financial markets hinder occupational mobility, then there is a clear role for monetary policy to improve economic outcomes ; We quantify the importance of financial frictions for occupational mobility and for economic welfare. We consider a world where financial markets are incomplete, occupations receive shocks, and switching occupations is costly for the aforementioned reasons. In our benchmark model we find that occupational mobility is significantly lower than in a world with complete financial markets. This translates into reduced economic welfare for individuals as they cannot efficiently reallocate across occupations. We then assess the impact of policies aimed at increasing occupational mobility. In a simple example, we find that an across the board subsidy to switching occupations increases mobility but not economic welfare.

Suggested Citation

  • William B. Hawkins & Jose Mustre-del-Rio, 2012. "Financial frictions and occupational mobility," Research Working Paper RWP 12-06, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp12-06
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    Cited by:

    1. German Cubas & Pedro Silos, 2020. "Social Insurance And Occupational Mobility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 219-240, February.
    2. Jacob Wong, 2012. "Aggregate Reallocation Shocks and the Dynamics of Occupational Mobility and Wage Inequality," School of Economics and Public Policy Working Papers 2012-04, University of Adelaide, School of Economics and Public Policy.
    3. Cubas, German & Silos, Pedro & Soini, Vesa, 2024. "Risk and the allocation of talent in the Roy model," Economics Letters, Elsevier, vol. 236(C).
    4. Daniele Coen‐Pirani, 2021. "Geographic Mobility And Redistribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 921-952, August.
    5. German Cubas & Pedro Silos & Vesa Soini, 2021. "Risk and the Misallocation of Human Capital," DETU Working Papers 2103, Department of Economics, Temple University.

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