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Unemployment Risk, Labour Force Participation and Savings

Berloffa, G. and Simmons, P. (2003) Unemployment Risk, Labour Force Participation and Savings. Review of Economic Studies, 70 (3). pp. 521-539. ISSN 0034-6527

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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.

Item Type: Article
Institution: The University of York
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: York RAE Import
Date Deposited: 17 Feb 2009 09:55
Last Modified: 17 Feb 2009 09:55
Published Version: http://dx.doi.org/10.1111/1467-937X.00254
Status: Published
Publisher: Blackwell Publishing Ltd.
Identification Number: 10.1111/1467-937X.00254
URI: http://eprints.whiterose.ac.uk/id/eprint/7416

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