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Can Risk Aversion in Firms Reduce Unemployment Persistence?

Author

Listed:
  • Ali Choudhary

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

Abstract

This paper contributes to the growing literature that attempts to explain unemployment persistence. We show that when the economy is struck by a negative transitory (or permanent) demand or supply shock, firms can find their way back quicker to the pre-shock (or new) employment levels if they are risk-averse. The reason is that risk aversion in firms creates a self-adjusting mechanism whereby cautious firms adjust hiring and wage-setting decisions to try to regain the pre-shock employment levels and minimize fluctuations in profits. Therefore, perhaps surprisingly, risk aversion in firms is seen as a stabilizing macroeconomic force that reduces unemployment inertia.

Suggested Citation

  • Ali Choudhary & Paul Levine, 2004. "Can Risk Aversion in Firms Reduce Unemployment Persistence?," School of Economics Discussion Papers 0704, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0704
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    File URL: https://repec.som.surrey.ac.uk/2004/DP07-04.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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