Secular Labor Reallocation and Business Cycles


Chodorow-Reich, Gabriel, and Johannes Wieland. 2017. “Secular Labor Reallocation and Business Cycles”.
Download paper3.17 MB
Download appendix386 KB


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.


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