Financial Frictions and Occupational Mobility

We study the effects of financial market incompleteness on occupational mobility. Incomplete insurance not only generates an increase in consumption volatility, but also reduces occupational mobility. 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 effects on such workers' future earnings than they would for better insured workers. In a calibrated model, we find that the welfare costs of market incompleteness can be as large as 12 percent of lifetime consumption