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Can Risk Aversion in Firms Reduce Unemployment Persistence?

  • Ali Choudhary

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

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.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2004/DP07-04.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0704.

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Length: 32 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:sur:surrec:0704
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