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Risk-averse firms and employment dynamics

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  • M. Ali Choudhary
  • Paul Levine

Abstract

In a turnover-training model, where firms fix high wages to lower worker turnover, we find that high risk-aversion in firms speeds up the adjustment process of unemployment to its natural levels when employers face either temporary or permanent shocks. Therefore, risk aversion has a stabilizing affect on the macroeconomy. This result complements the existing explanations for unemployment persistence. It also raises a general point concerning the wide-spread assumption of risk-neutrality on the part of firms in the real business cycle and New Keynesian DSGE literatures. Our analysis suggests that this is not an innocuous assumption for assessing fluctuations and the appropriate policy response. Assuming firms to be risk-neutral understates their self-stabilization characteristics and therefore leads to an exaggerated stabilization role for monetary and fiscal policies. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

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  • M. Ali Choudhary & Paul Levine, 2010. "Risk-averse firms and employment dynamics," Oxford Economic Papers, Oxford University Press, vol. 62(3), pages 578-602, July.
  • Handle: RePEc:oup:oxecpp:v:62:y:2010:i:3:p:578-602
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    File URL: http://hdl.handle.net/10.1093/oep/gpp036
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    1. Anders Forslund & Alan B. Krueger, 1997. "An Evaluation of the Swedish Active Labor Market Policy: New and Received Wisdom," NBER Chapters,in: The Welfare State in Transition: Reforming the Swedish Model, pages 267-298 National Bureau of Economic Research, Inc.
    2. Geweke, John, 1988. "Antithetic acceleration of Monte Carlo integration in Bayesian inference," Journal of Econometrics, Elsevier, vol. 38(1-2), pages 73-89.
    3. Calmfors, Lars & Forslund, Anders, 1991. "Real-Wage Determination and Labour Market Policies: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 101(408), pages 1130-1148, September.
    4. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
    5. DaVanzo, Julie, 1978. "Does Unemployment Affect Migration?-Evidence from Micro Data," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 504-514, November.
    6. Ohlsson, Henry, 1992. "Job creation measures as activist fiscal policy -- an empirical analysis of policy reaction behavior," European Journal of Political Economy, Elsevier, vol. 8(2), pages 269-280, May.
    7. Pissarides, Christopher A & McMaster, Ian, 1990. "Regional Migration, Wages and Unemployment: Empirical Evidence and Implications for Policy," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 812-831, October.
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    Cited by:

    1. Kölling, Arnd, 2016. "Family Firms and Labor Demand: Size Matters – But Only the Small Ones are Different," Annual Conference 2016 (Augsburg): Demographic Change 145471, Verein für Socialpolitik / German Economic Association.
    2. repec:zbw:imbwps:90 is not listed on IDEAS
    3. Bjuggren, Carl Magnus, 2015. "Sensitivity to shocks and implicit employment protection in family firms," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 18-31.
    4. Kölling, Arnd, 2017. "Employment in family firms: Less but safe? Analyzing labor demand of German family firms with a treatment model for panel data," Working Papers 92, Berlin School of Economics and Law, Institute of Management Berlin (IMB).

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