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Unemployment Risk, Labour Force Participation and Savings

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  • Gabriella Berloffa
  • Peter Simmons

Abstract

This 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 Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 97/7.

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Handle: RePEc:yor:yorken: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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Web page: http://www.york.ac.uk/economics/
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Cited by:
  1. Viola Angelini & Peter Simmons, . "Housing Debt and Consumption," Discussion Papers 11/20, Department of Economics, University of York.
  2. Carolina Fugazza, 2012. "Employment Risk over the Life Cycle," Carlo Alberto Notebooks 280, Collegio Carlo Alberto.
  3. 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.
  4. Angelini, Viola, 2009. "Consumption and habit formation when time horizon is finite," Economics Letters, Elsevier, vol. 103(2), pages 113-116, May.
  5. Viola Angelini & Peter Simmons, . "Housing Debt, Employment Risk and Consumption," Discussion Papers 05/07, Department of Economics, University of York.

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