Aggregate and Idiosyncratic Risk in a Frictional Labor Market

In this paper I develop a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption.1 I show that this leads to a form of equilibrium wage rigidity. This rigidity arises because the inability of workers to smooth their consumption across unemployment and employment spells changes how unemployed workers value wage offers, and hence also the offers that employers find profitable to make...