Idiosyncratic Risk and Aggregate Employment Dynamics

This paper studies how producers’ idiosyncratic risks impact aggregate employment dynamics when there is a trade-off between workers’ productivity and costs of job creation and destruction. In our analysis, increasing idiosyncratic risk induces producers to move workers out of structured jobs that are costly to create and destroy and into less-productive but more-flexible unstructured positions. This substitution leaves the producer’s total employment more responsive to both idiosyncratic and aggregate disturbances. We apply this insight to connect differences between young and old manufacturing plants’ aggregate employment dynamics with their corresponding differences in idiosyncratic variability. (JEL E00, L00, J00) ‡We thank John Leahy for valuable input. John Haltiwanger and Richard Rogerson provided very helpful discussions of an earlier draft. Campbell gratefully acknowledges research support from the National Science Foundation through grant SBR—9730442. The views expressed in this paper are not necessarily those of the Federal Reserve Bank of Chicago or of the Federal Reserve System. The latest version of this paper can be accessed on the World Wide Web at http://home.uchicago.edu/~jcampbe. Please direct correspondence to Campbell at Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637. ∗University of Chicago and NBER ([email protected]) †Federal Reserve Bank of Chicago ([email protected])