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The Competitive Allocation of Labor Market Risk: An Example

Working Paper 226 | Published October 1, 1982

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Authors

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S. Rao Aiyagari

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Neil Wallace

The Competitive Allocation of Labor Market Risk: An Example

Abstract

This note presents a model whose competitive equilibrium can be consistent with the observation that current labor market conditions affect the well-being of new entrants more than they do that of senior workers. The model uses the notion that new entrants are not around soon enough to participate in risk-sharing contingent on the shocks that determine the equilibrium marginal products of first-period employment. This timing notion is formalized using a stochastic overlapping generations model.