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Why Does Employment in All Major Sectors Move Together over the Business Cycle?

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  • Yaniv Yedid-Levi

    (The University of British Columbia)

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    Abstract

    In recessions, employment falls in all major sectors. Positive correlation of employment across sectors is a puzzle, because a standard two-sector business-cycle model driven by aggregate productivity shocks predicts negative correlation of total hours of work in the consumption-goods sector and the investment-goods sector. I start from the observation that most of the variability of total hours worked takes the form of variations in the number of workers. Hours per employed worker is only a secondary source of variation. The exten- sive margin is therefore critical in understanding the positive correlation of sectoral labor market variables, yet neglected by existing studies. This paper advances the literature on cross-sectoral correlation of employment by making unemployment an explicit feature of the model. I construct a two sector model with search and matching friction, capital ad- justment costs, and partial wage stickiness. The model explains the positive cross-sectoral correlation through movements of workers in both sectors into and out of unemployment.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 677.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:677

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    2. Silva, José Ignacio & Toledo, Manuel, 2009. "Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 76-96, May.
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    13. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
    14. Vázquez Pérez, Jesús & Cassou, Steven P., 2009. "Employment comovements at the sectoral level over the business cycle," DFAEII Working Papers 2009-.06, University of the Basque Country - Department of Foundations of Economic Analysis II.
    15. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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    17. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 899-927, August.
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