Must-Read: Gabriel Chodorow-Reich and Johannes Wieland: Secular Labor Reallocation and Business Cycles

Must-Read: Gabriel Chodorow-Reich and Johannes Wieland: Secular Labor Reallocation and Business Cycles:

We study how economies respond to idiosyncratic shocks which induce reallocation of labor across industries….

We find sharp evidence of reallocation contributing to worse employment outcomes if it occurs coincident with a national recession, but little difference in outcomes if it occurs during an expansion. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical asymmetry subject to inclusion of two key 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.