The Role of Uncertainty in Jobless Recoveries∗

The three most recent downturns, in contrast with other post-war recessions, are characterized by slow recoveries in employment despite positive economic growth. I find that recent recoveries coincide with high uncertainty about economy-wide corporate profits at a time when output begins to rebound, a pattern that was not observed in the earlier recessions. To examine the role of uncertainty in jobless recoveries, I develop a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and an intensive labor margin. The model is driven by productivity and time-varying volatility shocks. The uncertainty agents face is captured by time-varying volatility. Labor market search frictions generate costly labor adjustment. When an uncertainty shock hits the economy, firms reduce the number of vacancies posted because they are reluctant to make costly adjustments along the extensive margin. Instead, firms require more effort from their employees. This, along with positive productivity shocks, can result in jobless recoveries. I calibrate the model and show that, with the addition of uncertainty shocks, this model can replicate recent episodes of jobless recoveries. ∗I am grateful to my dissertation committee: Dale Mortensen, Giorgio Primiceri, and Thijs van Rens for their invaluable advice and support. I also wish to thank Matthias Kehrig, Ija Trapeznikova, Chris Vickers, and Nic Ziebarth, along with seminar participants at Northwestern University, for helpful discussions. †Email: [email protected]; Address: Department of Economics, 300 N Washington Street, Box 391, Gettysburg, PA 17325.