IDEAS home Printed from https://ideas.repec.org/p/sur/surrec/0303.html
   My bibliography  Save this paper

Self-Stabilizing Firms and Unemployment Persistence

Author

Listed:
  • Ali Choudhary

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

Abstract

The question of why the unemployment rate takes a long time before it reverts back to its natural-rate following a negative exogenous shock has been the subject of unremitting interest in macroeconomics. This paper shows that the speed of adjustment to the steady-state unemployment and the degree of risk-aversion in firms are positively related. The reason is that risk-aversion in firms creates a self-adjusting mechanism whereby cautious firms try to vigorously regain the pre-shock employment levels in an attempt to minimize fluctuations in profits.

Suggested Citation

  • Ali Choudhary & Paul Levine, 2003. "Self-Stabilizing Firms and Unemployment Persistence," School of Economics Discussion Papers 0303, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0303
    as

    Download full text from publisher

    File URL: https://repec.som.surrey.ac.uk/2003/DP03-03.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    2. Henry, Brian & Karanassou, Marika & Snower, Dennis J, 2000. "Adjustment Dynamics and the Natural Rate: An Account of UK Unemployment," Oxford Economic Papers, Oxford University Press, vol. 52(1), pages 178-203, January.
    3. Laurence Boone & Claude Giorno & Mara Meacci & David Rae & Pete Richardson & Dave Turner, 2003. "Estimating the structural rate of unemployment for the OECD countries," OECD Economic Studies, OECD Publishing, vol. 2001(2), pages 171-216.
    4. Olivier Jean Blanchard & Peter Diamond, 1994. "Ranking, Unemployment Duration, and Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 417-434.
    5. Karanassou, Marika & Snower, Dennis J, 1998. "How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory," Economic Journal, Royal Economic Society, vol. 108(448), pages 832-849, May.
    6. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-307, May.
    7. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, October.
    8. Kenneth R. MacCrimmon & Donald A. Wehrung, 1990. "Characteristics of Risk Taking Executives," Management Science, INFORMS, vol. 36(4), pages 422-435, April.
    9. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    10. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-125, March.
    11. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    12. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90, National Bureau of Economic Research, Inc.
    13. Bean, Charles R., 1994. "European unemployment: A retrospective," European Economic Review, Elsevier, vol. 38(3-4), pages 523-534, April.
    14. Calvo, Guillermo, 1979. "Quasi-Walrasian Theories of Unemployment," American Economic Review, American Economic Association, vol. 69(2), pages 102-107, May.
    15. Phelps, Edmund S & Zoega, Gylfi, 1998. "Natural-Rate Theory and OECD Unemployment," Economic Journal, Royal Economic Society, vol. 108(448), pages 782-801, May.
    16. Orszag, J. Michael & Zoega, Gylfi, 1996. "Wages ahead of demand," Economics Letters, Elsevier, vol. 53(3), pages 341-347, December.
    17. Marika Karanassou & Dennis J. Snower, 1998. "The Chain Reaction Theory of Unemployment: How Unemployment Moves in the Medium Run," Working Papers 398, Queen Mary University of London, School of Economics and Finance.
    18. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    19. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    20. Hoon, Hian Teck & Phelps, Edmund S, 1992. "Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 82(4), pages 889-900, September.
    21. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, April.
    22. Jeff Frank, 1990. "Monopolistic Competition, Risk Aversion, and Equilibrium Recessions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 921-938.
    23. MacCrimmon, Kenneth R & Wehrung, Donald A, 1984. "The Risk In-Basket," The Journal of Business, University of Chicago Press, vol. 57(3), pages 367-387, July.
    24. Orszag, Mike & Zoega, Gylfi, 1996. "Hiring Risk and Labour Market Equilibrium," CEPR Discussion Papers 1314, C.E.P.R. Discussion Papers.
    25. Phelps, Edmund S, 1992. "A Review of Unemployment," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1476-1490, September.
    26. R. Joseph Monsen & Jr. & Anthony Downs, 1965. "A Theory of Large Managerial Firms," Journal of Political Economy, University of Chicago Press, vol. 73(3), pages 221-221.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ali Choudhary & Paul Levine, 2004. "Can Risk Aversion in Firms Reduce Unemployment Persistence?," School of Economics Discussion Papers 0704, School of Economics, University of Surrey.
    2. Bianchi, Marco & Zoega, Gylfi, 1997. "Challenges facing natural rate theory," European Economic Review, Elsevier, vol. 41(3-5), pages 535-547, April.
    3. Gylfi Zoega, 2012. "Employment and asset prices," Applied Economics, Taylor & Francis Journals, vol. 44(26), pages 3343-3355, September.
    4. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
    5. Kurmaş Akdoğan, 2017. "Unemployment hysteresis and structural change in Europe," Empirical Economics, Springer, vol. 53(4), pages 1415-1440, December.
    6. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, February.
    7. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, vol. 10(3), pages 285-316, June.
    8. Kilponen, Juha & Mayes, David & Vilmunen, Jouko, 1999. "Labour Market Flexibility in Northern Europe," ERSA conference papers ersa99pa088, European Regional Science Association.
    9. Edmund S. Phelps, 1998. "Designing a Capitalist Economy for Fast Growth and High Employment in Today's Globalized World Economy," Journal of Applied Economics, Taylor & Francis Journals, vol. 1(1), pages 87-103, November.
    10. Karanassou, Marika & Sala, Hector & Snower, Dennis, 2003. "Unemployment in the European Union: a dynamic reappraisal," Economic Modelling, Elsevier, vol. 20(2), pages 237-273, March.
    11. Franz, Wolfgang, 1995. "Theoretische Ansätze zur Erklärung der Arbeitslosigkeit: Wo stehen wir 1995?," Discussion Papers 27, University of Konstanz, Center for International Labor Economics (CILE).
    12. Kurmaş Akdoğan, 2015. "Unemployment Hysteresis and Structural Change in Europe," EY International Congress on Economics II (EYC2015), November 5-6, 2015, Ankara, Turkey 266, Ekonomik Yaklasim Association.
    13. Zoega Gylfi, 2010. "The Financial Crisis: Joblessness and Investmentlessness," Capitalism and Society, De Gruyter, vol. 5(2), pages 1-28, October.
    14. Mayes, David G. & Vilmunen, Jouko, 1999. "Unemployment in a small open economy : Finland and New Zealand," Research Discussion Papers 10/1999, Bank of Finland.
    15. Orszag, J. Michael & Zoega, Gylfi, 1996. "Wages ahead of demand," Economics Letters, Elsevier, vol. 53(3), pages 341-347, December.
    16. repec:zbw:bofrdp:1999_010 is not listed on IDEAS
    17. Krebs, Tom & Maloney, William F., 1999. "Quitting and labor turnover : microeconomic evidence and macroeconomic consequences," Policy Research Working Paper Series 2068, The World Bank.
    18. García-Cintado, Alejandro & Romero-Ávila, Diego & Usabiaga, Carlos, 2015. "Can the hysteresis hypothesis in Spanish regional unemployment be beaten? New evidence from unit root tests with breaks," Economic Modelling, Elsevier, vol. 47(C), pages 244-252.
    19. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
    20. Aidt, Toke & Jayasri Dutta, 2002. "Policy compromises: corruption and regulation in a dynamic democracy," Royal Economic Society Annual Conference 2002 1, Royal Economic Society.
    21. Eugeniusz Kwiatkowski & Przemysław Włodarczyk, 2012. "Wpływ prawnej ochrony zatrudnienia na rynek pracy w warunkach negatywnego szoku ekonomicznego," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 11-12, pages 1-23.

    More about this item

    Keywords

    Unemployment; Persistence; Risk-Aversion.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sur:surrec:0303. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ioannis Lazopoulos (email available below). General contact details of provider: https://edirc.repec.org/data/desuruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.