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Uninsurable Individual Risk and the Cyclical Behavior of Unemployment and Vacancies

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  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • Enchuan Shao

    (University of Iowa)

Abstract

This paper is concerned with the business cycle dynamics in search and matching models of the labor market when agents are ex-post heterogeneous. We focus on wealth heterogeneity that comes as a result of imperfect opportunities to insure against idiosyncratic risk. We show that this heterogeneity implies wage rigidity relative to a complete insurance economy. The fraction of wealth poor agents pre- vents real wages from falling too much in recessions, since small decreases in income imply large losses in utility. Analogously, wages rise less in expansions compared to the standard model as small increases are enough for poor workers to accept job offers. This mechanism reduces the volatility of wages and increases the volatility of vacancies and unemployment. This channel can be relevant if the lack of insurance is large enough so that the fraction of agents close to the borrowing constraint is significant. However, discipline in the parameterization implies an earnings variance and a persistence in the unemployment state that results in a large degree of self insurance.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 420.

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Date of creation: 2007
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Handle: RePEc:red:sed007:420

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  1. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  2. Leena Rudanko, 2005. "Labor Market Dynamics under Long Term Wage Contracting," 2005 Meeting Papers 876, Society for Economic Dynamics.
  3. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  4. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711.
  5. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  6. Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997. "Equilibrium Unemployment," NBER Working Papers 5922, National Bureau of Economic Research, Inc.
  7. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  8. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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Cited by:
  1. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2009. "Comparative Advantage and Unemployment," RCER Working Papers 547, University of Rochester - Center for Economic Research (RCER).
  2. Nan Li & Ceyhun Bora Durdu & Emine Boz, 2010. "Labor Market Search in Emerging Economies," 2010 Meeting Papers 255, Society for Economic Dynamics.
  3. Leena Rudanko, 2008. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," Boston University - Department of Economics - Working Papers Series wp2008-009, Boston University - Department of Economics.
  4. Per Krusell & Toshihiko Mukoyama & Ayseg ul Sahin, 2007. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," Levine's Bibliography 122247000000001783, UCLA Department of Economics.
  5. 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.
  6. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2011. "Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 128-54, January.
  7. Carlos Miguel Silva & Ana Paula Ribeiro, 2011. "The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework," CEF.UP Working Papers 1104, Universidade do Porto, Faculdade de Economia do Porto.
  8. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.

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