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The labour market implications of economic uncertainty

September 11, 2021

Wouter den Haan, Lukas B. Freund, Pontus Rendahl 11 September 2021

There is convincing empirical evidence demonstrating that elevated uncertainty increases unemployment.1 The Covid-induced spike in uncertainty (Baker et al. 2020) and rising unemployment in many countries reinforce the importance of understanding exactly how uncertainty shapes labour market outcomes. One prominent transmission channel that economic research has highlighted relates to the option value of postponing investment. After an increase in uncertainty, firms may prefer to ‘wait and see’ instead of engaging in activities that are not easily reversed (Bernanke 1983). Since job creation is very much like an irreversible investment (with job creation costs being non-refundable), the

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