Idiosyncratic risk and aggregate employment dynamics

Jeffrey Campbell and Jonas Fisher

No WP-00-15, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper studies how producers? idiosyncratic risks affect an industry?s aggregate dynamics in an environment where certainty equivalence fails. In the model, producers can place workers in two types of jobs, organized and temporary. Workers are less productive in temporary jobs, but creating an organized job requires an irreversible investment of managerial resources. Increasing productivity risk raises the value of an unexercised option to create an organized job. Losing this option is one cost of immediate organized job creation, so an increase in its value induces substitution towards cheaper temporary jobs. Because they are costless to create and destroy, a producer using temporary jobs can be more flexible, responding more to both idiosyncratic and aggregate shocks. If all of an industry?s producers adapt to heightened idiosyncratic risk in this way, the industry as a whole can respond more to a given aggregate shock. This insight is used to better understand the observation from the U.S. manufacturing sector that groups of plants displaying high idiosyncratic variability also have large aggregate fluctuations.

Keywords: Employment (Economic theory); Temporary employees (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-dge and nep-ias
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Idiosyncratic Risk and Aggregate Employment Dynamics (2004)
Working Paper: Idiosyncratic Risk and Aggregate Employment Dynamics (2000)
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