Can Risk Aversion in Firms Reduce Unemployment Persistence?

Ali Choudhary and Paul Levine ()

No 704, School of Economics Discussion Papers from School of Economics, 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.

Keywords: Unemployment; Persistence; Risk Aversion (search for similar items in EconPapers)
JEL-codes: E24 E27 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-09
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repec.som.surrey.ac.uk/2004/DP07-04.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0704

Access Statistics for this paper

More papers in School of Economics Discussion Papers from School of Economics, University of Surrey Contact information at EDIRC.
Bibliographic data for series maintained by Ioannis Lazopoulos ().