← Search

Review of Financial Studies Vol. 33 No. 8 2020

Time-Varying Risk Premium and Unemployment Risk across Age Groups

Indrajit Mitra1; Yu Xu2

1 Ross School of Business, University of Michigan · 2 Faculty of Business and Economics, University of Hong Kong

Abstract

We show that time-varying risk premium in financial markets can explain a key, yet puzzling, feature of labor markets: the large differences in unemployment risk across worker age groups over the business cycle. Our search model features a time-varying risk premium and learning about unobserved heterogeneity in worker productivity. Their interaction generates large real effects through firms’ labor policies. Our model predicts higher unemployment risk of younger workers relative to prime-age workers when risk premium is high, and the employment ratio of prime-age to young workers to be more cyclical in high beta industries. We find empirical support for these predictions.

DOI
10.1093/rfs/hhz122
Volume
33
Issue
8
Pages
3624-3673
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite