Trading Down and the Business Cycle

Jaimovich, Nir; Rebelo, Sergio T.; Wong, Arlene

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Trading Down and the Business Cycle

NBER Working Paper No. w21539

60 Pages Posted: 8 Sep 2015 Last revised: 10 May 2026

See all articles by Nir Jaimovich

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Arlene Wong

Northwestern University - Department of Economics

There are 3 versions of this paper

Date Written: September 2015

Abstract

We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consumed. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. When households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We show that embedding quality choice in a business-cycle model improves the model's amplification and comovement properties.

Suggested Citation: Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio and Wong, Arlene, Trading Down and the Business Cycle (September 2015). NBER Working Paper No. w21539, Available at SSRN: https://ssrn.com/abstract=2656941