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Risk Shifting, Unemployment Insurance, and Layoffs

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  • Herschel I. Grossman

Abstract

This paper develops an analysis of labor markets in which the use of layoffs to effect employment separations does not imply that markets fail to clear or that the amount of employment is suboptimal relative to current perceptions. This analysis focuses on the interaction between contractual arrangements for shifting risk from workers to employers and tax-financed unemployment insurance. The key element in the analysis is that unemployment insurance is more attractive than risk shifting as a way for workers to obtain income during unemployment. The paper also analyses the effects of risk shifting and unemployment insurance on the magnitude of employment fluctuations. The analysis implies that, given the existence of unemployment insurance, the existence of risk-shifting arrangements makes employment less variable.

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File URL: http://www.nber.org/papers/w0424.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0424.

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Date of creation: Jan 1980
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Publication status: published as Grossman, Herschel I, 1981. "Incomplete Information, Risk Shifting, and Employment Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 189-97, April.
Handle: RePEc:nbr:nberwo:0424

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References

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  1. Baily, Martin Neil, 1977. "On the Theory of Layoffs and Unemployment," Econometrica, Econometric Society, Econometric Society, vol. 45(5), pages 1043-63, July.
  2. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 3(3), pages 305-316, July.
  3. Barro,Robert J. & Grossman,Herschel I., 2008. "Money Employment and Inflation," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521068659.
  4. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(1), pages 119-155, June.
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Cited by:
  1. Grossman, Herschel I, 1981. "Incomplete Information, Risk Shifting, and Employment Fluctuations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 189-97, April.

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