Explaining Cyclical Movements in Employment: Creative Destruction or Changes in Utilization

34 Pages Posted: 9 Nov 2006

See all articles by Andrew Figura

Andrew Figura

Board of Governors of the Federal Reserve System - Macroeconomic Analysis Section

Date Written: June 2006

Abstract

An important step in understanding why employment fluctuates cyclically is determining the relative importance of cyclical movements in permanent and temporary plant-level employment changes. If movements in permanent employment changes are important, then recessions are times when the destruction of job specific capital picks up and/or investment in new job capital slows. If movements in temporary employment changes are important, then employment fluctuations are related to the temporary movement of workers across activities (e.g., from work to home production or search and back again) as the relative costs/benefits of these activities change. I estimate that in the manufacturing sector temporary employment changes account for approximately 60 percent of the change in employment growth over the cycle. However, if permanent employment changes create and destroy more capital than temporary employment changes, then their economic consequences would be relatively greater. The correlation between gross permanent employment changes and capital intensity across industries supports the hypothesis that permanent employment changes do create and destroy more capital than temporary employment changes.

Keywords: Cyclical employment changes, permanent and temporary employment changes

JEL Classification: J23, E24

Suggested Citation

Figura, Andrew, Explaining Cyclical Movements in Employment: Creative Destruction or Changes in Utilization (June 2006). FEDS Working Paper No. 2006-23, Available at SSRN: https://ssrn.com/abstract=943767 or http://dx.doi.org/10.2139/ssrn.943767

Andrew Figura (Contact Author)

Board of Governors of the Federal Reserve System - Macroeconomic Analysis Section ( email )

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