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Volatile Hiring: Uncertainty in Search and Matching Models

Wouter Den Haan, Lukas Freund and Pontus Rendahl

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: In search-and-matching models, the nonlinear nature of search frictions increases average unemployment rates during periods with higher volatility. These frictions are not, however, by themselves sufficient to raise unemployment following an increase in perceived uncertainty; though they may do so in conjunction with the common assumption of wages being determined by Nash bargaining. Importantly, option-value considerations play no role in the standard model with free entry. In contrast, when the mass of entrepreneurs is finite and there is heterogeneity in firm-specific productivity, a rise in perceived uncertainty robustly increases the option value of waiting and reduces job creation.

Keywords: Uncertainty; search frictions; unemployment; option value (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Date: 2020-12-18
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Note: rpk22, lbf25
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