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Implications of Labor Market Frictions for Risk Aversion and Risk Premia

Eric Swanson

No 25764, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to partially offset wealth shocks by varying hours of work can significantly alter the household’s attitudes toward risk, as shown in Swanson (2012). In this paper, I analyze how frictional labor markets affect that analysis. Household risk aversion (as measured by willingness to pay to avoid a wealth shock) is higher: 1) in countries with more frictional labor markets, 2) in recessions, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. Quantitatively, I show that labor market frictions in Europe are large enough to play a substantial contributing role to risk aversion in those countries. Nevertheless, labor markets in the U.S. and Europe are sufficiently flexible that risk aversion is much closer to the frictionless benchmark in Swanson (2012) than to traditional measures that assume labor is fixed.

JEL-codes: D81 E24 E44 G12 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-mac and nep-upt
Note: AP EFG
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Published as Eric T. Swanson, 2020. "Implications of Labor Market Frictions for Risk Aversion and Risk Premia," American Economic Journal: Macroeconomics, vol 12(2), pages 194-240.

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Related works:
Journal Article: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2020) Downloads
Working Paper: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2013) Downloads
Working Paper: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2013) Downloads
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