Unemployment Volatility and the Cyclicality of the Job Surplus

The cyclicality of a job’s surplus is of central importance for the Mortensen-Pissarides theory of labor markets, but is not directly observable. A typical identifying assumption is that hours are chosen to maximize the surplus, which eliminates cyclical improvements in the allocation of hours within a match as a determinate of the surplus. However, when aggregate fluctuations are driven by shocks to labor productivity, this implication is inconsistent with the empirical behavior of hours per worker. I relax this assumption and quantify the impact on employment volatility. If the model is made consistent with the observed negative comovement of hours per worker and productivity, then the unemployment rate becomes substantially more volatile because the job surplus fluctuates more procyclically as hours are allocated more efficiently during expansions and less efficiently during recessions. 1