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Self-Stabilizing Firms and Unemployment Persistence

  • Ali Choudhary

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

The question of why the unemployment rate takes a long time before it reverts back to its natural-rate following a negative exogenous shock has been the subject of unremitting interest in macroeconomics. This paper shows that the speed of adjustment to the steady-state unemployment and the degree of risk-aversion in firms are positively related. The reason is that risk-aversion in firms creates a self-adjusting mechanism whereby cautious firms try to vigorously regain the pre-shock employment levels in an attempt to minimize fluctuations in profits.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2003/DP03-03.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0303.

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Length: 27 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:sur:surrec:0303
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