Secular Labor Reallocation and Business Cycles

Abstract

We revisit an old question: does industry labor reallocation affect the business cycle? Our empirical methodology exploits variation in a local labor market’s exposure to industry reallocation on the basis of 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 multiarea, multisector search-and-matching model with imperfect mobility across industries and downward nominal wage rigidity can reproduce these cross-sectional patterns.