Job Displacement Risk and the Cost of Business Cycles
AbstractThis paper analyzes the welfare costs of business cycles when workers face uninsurable job displacement risk. The paper uses a simple macroeconomic model with incomplete markets to show that cyclical variations in the long-term earnings losses of displaced workers can generate arbitrarily large cost of business cycles even if the variance of individual income changes is constant over the cycle. In addition to the theoretical analysis, this paper conducts a quantitative study of the cost of business cycles using empirical evidence on the long-term earnings losses of US workers. The quantitative analysis shows that realistic variations in job displacement risk generate sizable costs of business cycles, even though a second-moment analysis would suggest negligible costs. (JEL E21, E24, E32, J63)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 97 (2007)
Issue (Month): 3 (June)
Other versions of this item:
- Tom Krebs, 2005. "Job Displacement Risk and the Cost of Business Cycles," 2005 Meeting Papers 188, Society for Economic Dynamics.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why all the fuss about business cycles?
by Economic Logician in Economic Logic on 2009-09-01 14:25:00
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