Aggregate and Idiosyncratic Risk in a Frictional Labor Market
American Economic Review
vol. 101,
no. 6, October 2011
(pp. 2823-43)
Abstract
This paper develops a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption. I show that this leads to a form of equilibrium wage rigidity, as the inability of workers to smooth their consumption across unemployment and employment spells changes how unemployed workers value wage offers, and hence also the offers that employers find profitable to make. In the model risk-averse entrepreneurs use optimal long-term contracts to attract risk averse workers facing limited access to asset markets. A simple analytic representation for the equilibrium is derived. (JEL D81, E21, E24, E32, J31, J41, J64)Citation
Rudanko, Leena. 2011. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market." American Economic Review, 101 (6): 2823-43. DOI: 10.1257/aer.101.6.2823Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- E21 Macroeconomics: Consumption; Saving; Wealth
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- E32 Business Fluctuations; Cycles
- J31 Wage Level and Structure; Wage Differentials
- J41 Labor Contracts
- J64 Unemployment: Models, Duration, Incidence, and Job Search