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Self-Stabilizing Firms and Unemployment Persistence

Author

Listed:
  • Ali Choudhary

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

Abstract

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.

Suggested Citation

  • Ali Choudhary & Paul Levine, 2003. "Self-Stabilizing Firms and Unemployment Persistence," School of Economics Discussion Papers 0303, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0303
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    File URL: https://repec.som.surrey.ac.uk/2003/DP03-03.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Unemployment; Persistence; Risk-Aversion.;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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