Idiosyncratic Risk and Aggregate Employment Dynamics

Jeffrey R. Campbell, Jonas D.M.Fisher

NBER Working Paper No. 7936
Issued in October 2000
NBER Program(s):   EFG

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.

download in pdf format
   (1254 K)

email paper

This paper is available as PDF (1254 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7936

Published: Campbell, Jeffrey R. and Jonas D. M. Fisher. "Idiosyncratic Risk And Aggregate Employment Dynamics," Review of Economic Dynamics, 2004, v7(2,Apr), 331-353. citation courtesy of

Users who downloaded this paper also downloaded these:
Olmstead and Rhode Were Antebellum Cotton Plantations Factories in the Field?
Corsetti, Pesenti, and Roubini Fundamental Determinants of the Asian Crisis: The Role of Financial Fragility and External Imbalances
Dills, Miron, and Summers What Do Economists Know about Crime?
Morck Introduction to "Concentrated Corporate Ownership"
Jaffee and Quigley Housing Policy, Mortgage Policy, and the Federal Housing Administration
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us