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Unemployment Risk, Labour Force Participation and Savings

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  • Gabriella Berloffa
  • Peter Simmons

Abstract

This paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market. We use a finite horizon framework with two employment states and a stage utility function which is CARA in consumption but non-separable in leisure. The results are that there is precautionary labour force participation: employment risk lowers the reservation wage; generally it also reduces consumption. However due to the non-separability assumption, precautionary savings, as usually defined, may not be positive. We characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption. We extend the analysis to study the effects of cyclical variation in employment risk, of stochastic future wage rates, and of adding a third employment state of search. Copyright 2003, Wiley-Blackwell.

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  • Gabriella Berloffa & Peter Simmons, 2003. "Unemployment Risk, Labour Force Participation and Savings," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 521-539.
    • Handle: RePEc:oup:restud:v:70:y:2003:i:3:p:521-539
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00254
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    Cited by:

    1. Carolina Fugazza, 2012. "Employment Risk over the Life Cycle," Carlo Alberto Notebooks 280, Collegio Carlo Alberto.
    2. Wolfgang Nagl, 2012. "Better Safe than Sorry? The Effects of Income Risk, Unemployment Risk and the Interaction of these Risks on Wages," ifo Working Paper Series 148, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    3. Peter Simmons, 2010. "Effects of Structural Constraints and Costs on Choices," LABOUR, CEIS, vol. 24(s1), pages 25-45, December.
    4. Lammers, Marloes, 2014. "The effects of savings on reservation wages and search effort," Labour Economics, Elsevier, vol. 27(C), pages 83-98.
    5. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    6. Meng, Lei & Zhao, Min Qiang, 2018. "Permanent and temporary rural–urban migration in China: Evidence from field surveys," China Economic Review, Elsevier, vol. 51(C), pages 228-239.
    7. Wolfgang Nagl, 2014. "Better Safe than Sorry? The Effects of Income Risk and Unemployment Risk on Wages," LABOUR, CEIS, vol. 28(3), pages 251-268, September.
    8. Angelini, Viola, 2009. "Consumption and habit formation when time horizon is finite," Economics Letters, Elsevier, vol. 103(2), pages 113-116, May.
    9. Viola Angelini & Peter Simmons, "undated". "Housing Debt and Consumption," Discussion Papers 11/20, Department of Economics, University of York.
    10. Viola Angelini & Peter Simmons, "undated". "Housing Debt, Employment Risk and Consumption," Discussion Papers 05/07, Department of Economics, University of York.
    11. Francesco Mariotti & Maria Dickson & Karen Mumford & Yolanda Pena-Boquete, 2016. "Job Insecurity Within the Household: Are Australian Householders Caring When it Comes to Risk Sharing?," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 19(2), pages 77-90.
    12. Wolfgang Nagl, 2014. "Lohnrisiko und Altersarmut im Sozialstaat," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 54.

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