Abstract
The question of why the unemployment rate takes a long time before it reverts back to its natural-rate following a negative exogenous shock has been the subject of unremitting interest in macroeconomics. This paper shows that the speed of adjustment to the steady-state unemployment and the degree of risk-aversion in firms are positively related. The reason is that risk-aversion in firms creates a self-adjusting mechanism whereby cautious firms try to vigorously regain the pre-shock employment levels in an attempt to minimize fluctuations in profits.