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Den Haan, W., Freund, L. B. and Rendahl, P.

Volatile Hiring: Uncertainty in Search and Matching Models

WP Number: 2056

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

JEL Codes: E24 E32 J64

Author links: Pontus Rendahl  Lukas Freund  

PDF: wp2056.pdf

Open Access Link: 10.17863/CAM.62841