DP14630 Volatile Hiring: Uncertainty in Search and Matching Models

Author(s): Wouter Den Haan, Lukas Freund, Pontus Rendahl
Publication Date: May 2020
Date Revised: December 2020
Keyword(s): Option value, search frictions, uncertainty, unemployment
JEL(s): E24, E32, J64
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14630

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.