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Risk sharing, the minimum wage, and the business cycle

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  • Jean-Pierre Danthine

    (UNIL - Université de Lausanne = University of Lausanne)

  • John B. Donaldson

    (Columbia University [New York])

Abstract

This paper constructs a dynamic general equilibrium model in which labor incomes are influenced by risk sharing considerations and borrowing restrictions. We show that the dynamic properties of such an economy, in which the sharing of income and risk is effected solely via the labor market, are consistent with the principal stylized facts of the business cycle. We consider a situation in which workers are unable to borrow against their future income. This capital market imperfection is seen to alter the workings of the labor market whereby the latter substitutes as the vehicle for income and risk reallocation. The implications of this substitution for labor markets have been highlighted in the implicit contracts literature. Our objective here is to show how the introduction of such considerations affects the time series properties of a specific dynamic, multi-agent general equilibrium model

Suggested Citation

  • Jean-Pierre Danthine & John B. Donaldson, 1990. "Risk sharing, the minimum wage, and the business cycle," Working Papers hal-01541387, HAL.
    • Handle: RePEc:hal:wpaper:hal-01541387
    Note: View the original document on HAL open archive server: https://hal.science/hal-01541387
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    References listed on IDEAS

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    1. Danthine, Jean-Pierre & Donaldson, John B. & Mehra, Rajnish, 1989. "On some computational aspects of equilibrium business cycle theory," Journal of Economic Dynamics and Control, Elsevier, vol. 13(3), pages 449-470, July.
    2. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-450, June.
    3. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
    4. Hiroshi Osano, 1988. "Real Business Cycles in a Dynamic Labor Contract Equilibrium," Discussion Papers 809, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-1175, September.
    6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    8. Wright, Randall D, 1988. "The Observational Implications of Labor Contracts in a Dynamic General Equilibrium Model," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 530-551, October.
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    Cited by:

    1. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series 2465, CESifo.
    2. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," PSE Working Papers halshs-00590433, HAL.
    3. Carlos Borondo, 1994. "La rigidez nominal de los precios de la Nueva Economía Keynesiana: una panorámica," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 245-288, May.

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