Journal Article

Unemployment Risk, Labour Force Participation and Savings

Gabriella Berloffa and Peter Simmons

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 3, pages 521-539
Published in print July 2003 | ISSN: 0034-6527
Published online July 2003 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00254
Unemployment Risk, Labour Force Participation and Savings

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  • Demand and Supply of Labour
  • Household Behaviour and Family Economics
  • Particular Labour Markets
  • Wages, Compensation, and Labour Costs

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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.

Keywords: D14; J22; J31; J41

Journal Article.  9157 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Household Behaviour and Family Economics ; Particular Labour Markets ; Wages, Compensation, and Labour Costs

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