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Implications of Labor Market Frictions for Risk Aversion and Risk Premia

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  • Eric T. Swanson

Abstract

A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along both margins can greatly alter the household?s attitudes toward risk, as shown in Swanson (2012). The present paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher: 1) in recessions, 2) in countries with more frictional labor markets, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. Traditional, fixed-labor measures of risk aversion show no stable relationship to the equity premium in a standard real business cycle model with search frictions, while the closed-form expressions derived in the present paper match the equity premium closely.

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  • Eric T. Swanson, 2013. "Implications of Labor Market Frictions for Risk Aversion and Risk Premia," Working Paper Series 2013-30, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2013-30
    DOI: 10.24148/wp2013-30
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    3. Kangoh Lee, 2021. "Labor market frictions, capital, taxes and employment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1329-1359, December.
    4. Lea Steininger & Jan Philipp Fritsche, 2022. "The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics," Department of Economics Working Papers wuwp326, Vienna University of Economics and Business, Department of Economics.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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