Heterogeneous Information and Labor Market Fluctuations

Abstract

Idiosyncratic productivity shocks induce larger adjustments to hiring than aggregate shocks, because general equilibrium effects on search frictions and wages partially offset the latter. When firms cannot disentangle the two shocks, they attribute aggregate disturbances partly to idiosyncratic factors and to that extent, respond more aggressively. This translates into increased aggregate volatility, an order of magnitude higher than the benchmark full information model. A calibrated model predicts moments that match closely levels observed in the US data. These results hold under both random and directed search specifications.