Self-Stabilizing Firms and Unemployment Persistence

Ali Choudhary and Paul Levine ()

No 303, School of Economics Discussion Papers from School of Economics, 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.

Keywords: Unemployment; Persistence; Risk-Aversion. (search for similar items in EconPapers)
JEL-codes: E24 E27 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2003-02
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0303

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