Ewen Gallic : ewen.gallic[at]univ-amu.fr
Avner Seror : avner.seror[at]univ-amu.fr
Andreas Dibiasi : andreas.dibiasi[at]univ-amu.fr
Céline Poilly : celine.poilly[at]univ-amu.fr
We investigate the welfare consequences of turbulence risk—the risk of skill loss coinciding with involuntary layoffs—on individual and aggregate labor market outcomes. 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 turbulence risk and wealth on re-employment wages, occupational mobility, and unemployment duration. We measure the welfare loss of unemployment transitions and quantify the role of precautionary savings, precautionary job search, and precautionary occupational mobility as self-insurance mechanisms. Finally, we examine the welfare gain from alternative government policies.