High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations.

The article establishes an observational equivalence between unemployment fluctuations in two labor market economies: one based on the Diamond-Mortensen-Pissarides (DMP) search model augmented with time-varying risk premia, and an otherwise identical economy without risk premia but featuring a time-varying effective value of leisure. This equivalence holds generally and implies that the effects of various risk premia models on unemployment dynamics operate through a single channel—altering the value of leisure. The authors derive expressions for the semielasticities of labor market tightness with respect to productivity and risk premium shocks, showing that wages can reveal misspecifications in the discount rate process firms use in hiring decisions. Extensions include settings with fixed vacancy posting costs, disaster risk, priced discount rate shocks, and worker heterogeneity, with the equivalence result providing a unified framework to interpret labor market fluctuations under different financial discounting assumptions.