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Risk Shifting, Unemployment Insurance, and Layoffs

  • Herschel I. Grossman

This paper develops an analysis of labor markets in which the use of layoffs to effect employment separations does not imply that markets fail to clear or that the amount of employment is suboptimal relative to current perceptions. This analysis focuses on the interaction between contractual arrangements for shifting risk from workers to employers and tax-financed unemployment insurance. The key element in the analysis is that unemployment insurance is more attractive than risk shifting as a way for workers to obtain income during unemployment. The paper also analyses the effects of risk shifting and unemployment insurance on the magnitude of employment fluctuations. The analysis implies that, given the existence of unemployment insurance, the existence of risk-shifting arrangements makes employment less variable.

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File URL: http://www.nber.org/papers/w0424.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0424.

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Date of creation: Jan 1980
Date of revision:
Publication status: published as Grossman, Herschel I, 1981. "Incomplete Information, Risk Shifting, and Employment Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 189-97, April.
Handle: RePEc:nbr:nberwo:0424
Note: LS EFG
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  1. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  2. repec:cup:cbooks:9780521068659 is not listed on IDEAS
  3. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June.
  4. Baily, Martin Neil, 1977. "On the Theory of Layoffs and Unemployment," Econometrica, Econometric Society, vol. 45(5), pages 1043-63, July.
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