Secular Labor Reallocation and Business Cycles

47 Pages Posted: 12 Jan 2016

See all articles by Gabriel Chodorow-Reich

Gabriel Chodorow-Reich

Harvard University Department of Economics

Johannes Wieland

University of California, San Diego (UCSD) - Department of Economics

Date Written: January 2016

Abstract

We study the effect of mean-preserving labor reallocation on business cycle outcomes. We develop an empirical methodology using a local area's exposure to industry reallocation based on the area's initial industry composition and employment trends in the rest of the country over a full employment cycle. Using confidential employment data by local area and industry over the period 1980-2014, we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical results subject to inclusion of two key, empirically plausible frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model results, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level.

Suggested Citation

Chodorow-Reich, Gabriel and Wieland, Johannes, Secular Labor Reallocation and Business Cycles (January 2016). NBER Working Paper No. w21864. Available at SSRN: https://ssrn.com/abstract=2713589

Gabriel Chodorow-Reich (Contact Author)

Harvard University Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
6174963226 (Phone)
6174963226 (Fax)

HOME PAGE: http://scholar.harvard.edu/chodorow-reich

Johannes Wieland

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

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