Sharing risk within and across countries: the role of labor market institutions

•This paper shows how labor market institutions may affect within and cross-country risk sharing.•Risk-shifting institutional arrangements redistribute risk among agent types within country borders and reduce the fluctuations of otherwise uninsured labor incomes.•Fluctuations of capital incomes and of cross-country capital income flows are amplified.•Capital-owners also bear the burden of systematic world aggregate uncertainty.

This paper studies the effect of labor market institutions on within- and cross-country risk sharing, using a model of international trade in risky assets modified to include a subset of agents, labor-owners who do not access financial markets, and employment security provisions. Labor market, institutions, by promoting within-country risk-shifting arrangements between agents with or without, access to financial markets, reduce the fluctuations of non-tradable labor incomes and amplify the, fluctuations of capital incomes. Capital flows become more volatile across countries, and if the, configuration of labor markets differs across countries, capital-owners bear the burden of systematic, undiversifiable world aggregate uncertainty.