Secular Labor Reallocation and Business Cycles

Citation:

Chodorow-Reich, Gabriel, and Johannes Wieland. 2017. “Secular Labor Reallocation and Business Cycles”.
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Abstract:

We revisit an old question: does industry labor reallocation affect the business cycle? Our empirical methodology exploits variation in a local area'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. The same model implies that labor reallocation substantially amplifies the increase in aggregate unemployment during recessions, but has little impact on aggregate employment in expansions.

Notes:

Revise and Resubmit, Journal of Political Economy
Last updated on 11/03/2017