Employment Fluctuations and the Mitigation of Risk

The main ideas discussed in this paper can be briefly summarized as follows: First, although risk-mitigating arrangements 2014 specifically, risk shifting in labor markets and risk pooling in product markets 2014 suggest an explanation for certain specified features of macroeconomic fluctuations, risk-mitigating contractual arrangements are neither necessary nor sufficient to cause any particular disturbance to produce output and employment fluctuations. Second, given that a stochastic disturbance is going to affect output and employment, risk-mitigating arrangements can affect the amplitude of these fluctuations. Specifically, risk-mitigating arrangements reduce and reallocate the risks associated with stochastic disturbances. This process produces at least three effects on the variation in aggregate employment. These effects are changes in worker tolerance of employment fluctuations, increased variation in spot product prices, and relatively greater income variation for agents who probably have relatively high marginal spending propensities. In addition to these effects the existence of contractual markets has a potential effect on the form of the inference problem that agents face in determining the nature of disturbances in a context of incomplete information. Third, despite some similarities, a macroeconomic model that encompasses risk-mitigating arrangements differs in important ways from models that utilize the non-market-clearing approach to analysis of the determination of income and employment.