When Uncertainty Raises Hiring

We study when productivity volatility raises hiring. In the U.S., total productivity volatility predicts higher unemployment and lower labor-market tightness. After removing the component explained by current aggregate conditions and their recent history, however, volatility predicts lower unemployment, higher tightness, and higher job finding. We develop a labor search model with aggregate productivity risk, match-specific productivity, hiring costs, and flexible or sticky wage setting. Volatility affects job finding through state-dependent hiring cutoffs and vacancy creation. The aggregate response is positive when these margins improve in states with large unemployment weight. Sticky wages amplify this response by limiting pass-through of surplus gains to workers.