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Idiosyncratic Risk and Aggregate Employment Dynamics

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  • Jeffrey R. Campbell
  • Jonas D.M.Fisher

Abstract

This paper studies how producers' idiosyncratic risks affect an industry's aggregate dynamics in an environment where certainty equivalence fails. In the model, producers can place workers in two types of jobs, organized and temporary. Workers are less productive in temporary jobs, but creating an organized job requires an irreversible investment of managerial resources. Increasing productivity risk raises the value of an unexercised option to create an organized job. Losing this option is one cost of immediate organized job creation, so an increase in its value induces substitution towards cheaper temporary jobs. Because they are costless to create and destroy, a producer using temporary jobs can be more flexible, responding more to both idiosyncratic and aggregate shocks. If all of an industry's producers adapt to heightened idiosyncratic risk in this way, the industry as a whole can respond more to a given aggregate shock. This insight is used to better understand the observation from the U.S. manufacturing sector that groups of plants displaying high idiosyncratic variability also have large aggregate fluctuations.

Suggested Citation

  • Jeffrey R. Campbell & Jonas D.M.Fisher, 2000. "Idiosyncratic Risk and Aggregate Employment Dynamics," NBER Working Papers 7936, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7936 Note: EFG
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    Cited by:

    1. Nilsen, Oivind A. & Salvanes, Kjell G. & Schiantarelli, Fabio, 2007. "Employment changes, the structure of adjustment costs, and plant size," European Economic Review, Elsevier, vol. 51(3), pages 577-598, April.
    2. Yukako Ono & Daniel Sullivan, 2013. "Manufacturing Plants' Use of Temporary Workers: An Analysis Using Census Microdata," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(2), pages 419-443, April.
    3. Ouyang, Min, 2009. "The scarring effect of recessions," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 184-199, March.
    4. Min Ouyang, 2006. "Plant Life Cycle and Aggregate Employment Dynamics," Working Papers 050632, University of California-Irvine, Department of Economics.
    5. Simon Gilchrist & John C. Williams, 2005. "Investment, Capacity, and Uncertainty: A Putty-Clay Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 1-27, January.
    6. Carvalho, Vasco M & Grassi, Basile, 2015. "Large Firm Dynamics and the Business Cycle," CEPR Discussion Papers 10587, C.E.P.R. Discussion Papers.
    7. Tang, Jenn-Hong, 2007. "Gross job flows and technology shocks in nondurable and durable goods sectors," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 326-354, June.
    8. Griffin, Naomi N., 2010. "Labor adjustment, productivity and output volatility: An evaluation of Japan's Employment Adjustment Subsidy," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 28-49, March.
    9. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    10. Øivind A. Nilsen & Arvid Raknerud & Marina Rybalka & Terje Skjerpen, 2005. "Lumpy Investments, Factor Adjustments and Productivity," Discussion Papers 441, Statistics Norway, Research Department.
    11. Eugenio P. Pinto, 2009. "Firms' relative sensitivity to aggregate shocks and the dynamics of gross job flows," Finance and Economics Discussion Series 2009-02, Board of Governors of the Federal Reserve System (U.S.).
    12. Zvi Hercowitz & Jeffrey C. Campbell, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," 2005 Meeting Papers 120, Society for Economic Dynamics.
    13. Young, Andrew T., 2005. "Reallocating labor to initiate changes in capital structures: Hayek revisited," Economics Letters, Elsevier, vol. 89(3), pages 275-282, December.
    14. Naomi N. Griffin, 2005. "Labor Adjustment, Productivity and Output Volatility: An Evaluation of Japan's Employment Adjustment Subsidy: Working Paper 2005-10," Working Papers 17567, Congressional Budget Office.
    15. Pinto, Eugénio, 2011. "Firms' relative sensitivity to aggregate shocks and the dynamics of gross job flows," Labour Economics, Elsevier, vol. 18(1), pages 111-119, January.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • L00 - Industrial Organization - - General - - - General

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