Volatile Hiring: Uncertainty in Search and Matching Models

This paper analyzes in detail the role of uncertainty shocks in search and matching models of the labor market, both when uncertainty actually increases and when it is only expected to do so. The non-linear nature of search frictions increases average unemployment rates during periods with higher volatility. However, they are by themselves not sufficient to raise the unemployment rate in response to an increase in perceived uncertainty. We show that key to understanding the result of Leduc and Liu (2016) that perceived uncertainty does affect the unemployment rate is the particular form of wage bargaining chosen, Nash bargaining; option value considerations play no role.