Risk sharing, the minimum wage, and the business cycle

This paper constructs a dynamic general equilibrium model in which labor incomes are influenced by risk sharing considerations and borrowing restrictions. We show that the dynamic properties of such an economy, in which the sharing of income and risk is effected solely via the labor market, are consistent with the principal stylized facts of the business cycle. We consider a situation in which workers are unable to borrow against their future income. This capital market imperfection is seen to alter the workings of the labor market whereby the latter substitutes as the vehicle for income and risk reallocation. The implications of this substitution for labor markets have been highlighted in the implicit contracts literature. Our objective here is to show how the introduction of such considerations affects the time series properties of a specific dynamic, multi-agent general equilibrium mode