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Job Displacement Risk and the Cost of Business Cycles

  • Tom Krebs

    ()

    (Dept of Economics Brown University)

This paper analyzes the welfare costs of business cycles when workers face uninsurable job displacement risk. The paper uses a simple macroeconomic model with incomplete markets to show that cyclical variations in the long-term earnings losses of displaced workers can generate arbitrarily large cost of business cycles even if the variance of individual income changes is constant over the cycle. In addition to the theoretical analysis, this paper conducts a quantitative study of the cost of business cycles using empirical evidence on the long-term earnings losses of US workers. The quantitative analysis shows that realistic variations in job displacement risk generate sizable costs of business cycles, even though a second-moment analysis would suggest negligible costs. (JEL E21, E24, E32, J63)

(This abstract was borrowed from another version of this item.)

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 188.

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Date of creation: 2005
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Handle: RePEc:red:sed005:188
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  1. Rogerson, Richard & Schindler, Martin, 2002. "The welfare costs of worker displacement," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1213-1234, September.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. Fernando Alvarez & Urban J. Jermann, 2004. "Using Asset Prices to Measure the Cost of Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1223-1256, December.
  4. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  5. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2008. "Appendices for "Revisiting the Welfare Effects of Eliminating Business Cycles"," Technical Appendices 08-211, Review of Economic Dynamics.
  6. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
  7. Joao Gomes & Jeremy Greenwood & Sergio T. Rebelo, 2001. "Equilibrium Unemployment," RCER Working Papers 479, University of Rochester - Center for Economic Research (RCER).
  8. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.
  9. Attanasio, Orazio P., 1999. "Consumption," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 11, pages 741-812 Elsevier.
  10. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues 92-28, Federal Reserve Bank of Chicago.
  11. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  12. Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
  13. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  14. Gueorgui Kambourov & Iourii Manovskii, 2009. "Occupational Specificity Of Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 63-115, 02.
  15. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  16. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  17. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
  18. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "The Welfare Cost of Business Cycles Revisited: Finite Lives and Cyclical Variation in Idiosyncratic Risk," NBER Working Papers 8040, National Bureau of Economic Research, Inc.
  19. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
  20. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  21. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1993. "Long-term earnings losses of high-seniority displaced workers," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-20.
  22. Tom Krebs, 2003. "Human Capital Risk And Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 709-744, May.
  23. Krebs, Tom, 2004. "Testable implications of consumption-based asset pricing models with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 191-206, February.
  24. Tom Krebs, 2000. "Consumption-Based Asset Pricing with Incomplete Markets," Working Papers 2000-10, Brown University, Department of Economics.
  25. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  26. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
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