A flexible labor margin allows households to absorb asset value shocks with changes in hours worked, altering the households' attitudes toward risk (Swanson 2012). This paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher (i) in countries with more frictional labor markets, (ii) in recessions, and (iii) for households that have more difficulty finding a job. Labor market frictions in Europe are large enough to raise risk aversion in those countries. Nevertheless, risk aversion in the United States and Europe is much closer to the frictionless benchmark in Swanson (2012) than to traditional, fixed-labor measures.
Swanson, Eric T.
"Implications of Labor Market Frictions for Risk Aversion and Risk Premia."
American Economic Journal: Macroeconomics,
Consumer Economics: Theory
Criteria for Decision-Making under Risk and Uncertainty
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Time Allocation and Labor Supply