Unemployment Risk, Labour Force Participation and Savings
AbstractThis paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market. We use a finite horizon framework with two employment states and a stage utility function which is CARA in consumption but non-separable in leisure. The results are that there is precautionary labour force participation: employment risk lowers the reservation wage; generally it also reduces consumption. However due to the non-separability assumption, precautionary savings, as usually defined, may not be positive. We characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption. We extend the analysis to study the effects of cyclical variation in employment risk, of stochastic future wage rates, and of adding a third employment state of search. Copyright The Review of Economic Studies Limited, 2003.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 97/7.
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Other versions of this item:
- Gabriella Berloffa & Peter Simmons, 2003. "Unemployment Risk, Labour Force Participation and Savings," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 521-539, 07.
- Gabriella Berloffa & Peter Simmons, 1999. "Unemployment risk, labour force participation and savings," Department of Economics Working Papers 9902, Department of Economics, University of Trento, Italia.
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- Carolina Fugazza, 2012. "Employment Risk over the Life Cycle," Carlo Alberto Notebooks 280, Collegio Carlo Alberto.
- Wolfgang Nagl, 2012. "Better Safe than Sorry? The Effects of Income Risk, Unemployment Risk and the Interaction of these Risks on Wages," Ifo Working Paper Series Ifo Working Paper No. 148, Ifo Institute for Economic Research at the University of Munich.
- Angelini, Viola, 2009.
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Elsevier, vol. 103(2), pages 113-116, May.
- Viola Angelini, 2006. "Consumption and Habit Formation when Time Horizon is Finite," Discussion Papers 06/27, Department of Economics, University of York.
- Viola Angelini & Peter Simmons, . "Housing Debt, Employment Risk and Consumption," Discussion Papers 05/07, Department of Economics, University of York.
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