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Implications of Labor Market Frictions for Risk Aversion and Risk Premia†

Implications of Labor Market Frictions for Risk Aversion and Risk Premia† AbstractA flexible labor margin allows households to absorb asset value shocks with changes in hours worked, altering the households’ attitudes toward risk (Swanson 2012). This paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher (i) in countries with more frictional labor markets, (ii ) in recessions, and (iii ) for households that have more difficulty finding a job. Labor market frictions in Europe are large enough to raise risk aversion in those countries. Nevertheless, risk aversion in the United States and Europe is much closer to the frictionless benchmark in Swanson (2012) than to traditional, fixed-labor measures. (JEL D11, D81, E24, E32, J22) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Implications of Labor Market Frictions for Risk Aversion and Risk Premia†

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Publisher
American Economic Association
Copyright
Copyright © 2020 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20170446
Publisher site
See Article on Publisher Site

Abstract

AbstractA flexible labor margin allows households to absorb asset value shocks with changes in hours worked, altering the households’ attitudes toward risk (Swanson 2012). This paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher (i) in countries with more frictional labor markets, (ii ) in recessions, and (iii ) for households that have more difficulty finding a job. Labor market frictions in Europe are large enough to raise risk aversion in those countries. Nevertheless, risk aversion in the United States and Europe is much closer to the frictionless benchmark in Swanson (2012) than to traditional, fixed-labor measures. (JEL D11, D81, E24, E32, J22)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2020

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