Abstract:

We revisit an old question: does industry labor reallocation affect the business cycle? Our empirical methodology exploits variation in a local labor market's exposure to industry reallocation based on the area's initial industry composition and national industry employment trends for identification. Applied to confidential employment data over 1980-2014, we find sharp evidence of reallocation contributing to higher local area unemployment if it occurs during a national recession, but little difference in outcomes during an expansion. A multi-area, multi-sector search and matching model with imperfect mobility across industries and downward nominal wage rigidity can reproduce these cross-sectional patterns. 

Notes:

Stata program to implement two sample 2sls: ts2sls.ado, ts2sls.sthlp .

Publisher's Version