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Aggregate and Idiosyncratic Risk in a Frictional Labor Market

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  • Leena Rudanko

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)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 6 (October)
Pages: 2823-43

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2823-43

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Citations

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Cited by:
  1. Kuehn, Lars-Alexander & Petrosky-Nadeau, Nicolas & Zhang, Lu, 2011. "An Equilibrium Asset Pricing Model with Labor Market Search," Working Paper Series 2012-01, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Guler, Bulent & Guvenen, Fatih & Violante, Giovanni L., 2012. "Joint-search theory: New opportunities and new frictions," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 352-369.
  3. Philipp Kircher & Leo Kaas, 2010. "Efficient Firm Dynamics in a Frictional Labor Market," 2010 Meeting Papers 89, Society for Economic Dynamics.
  4. Leena Rudanko, 2005. "Labor Market Dynamics under Long Term Wage Contracting," 2005 Meeting Papers 876, Society for Economic Dynamics.
  5. Fabien Postel-Vinay & Giuseppe Moscarini, 2009. "Non-Stationary Search Equilibrium," 2009 Meeting Papers 31, Society for Economic Dynamics.
  6. Giuseppe Moscarini & Fabien Postel-Vinay, 2010. "Stochastic Search Equilibrium," Levine's Working Paper Archive 661465000000000001, David K. Levine.
  7. Alisdair McKay & Tamas Papp, 2011. "Accounting for Idiosyncratic Wage Risk Over the Business Cycle," Boston University - Department of Economics - Working Papers Series WP2011-028, Boston University - Department of Economics.

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