Abstract
We study the eects of nancial market incompleteness on occupational mobility. Incomplete insurance reduces occupational mobility and, as a result, the correlation of labor supply with occupational productivity 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 eects on such workers’ future earnings than they would for better insured workers. In a model calibrated to match observations from the Survey of Income and Program Participation (SIPP), we nd welfare costs of market incompleteness averaging 2.4 percent of lifetime consumption. We examine policies to increase
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