From bricklayers to waiters: Reallocation in a deep recession

This presentation explores how the local sectoral composition influences workers' adjustment to a large economic shock. I exploit the massive burst in the Spanish construction sector during the Great Recession. For identification, I leverage regional variation in the intensity of the employment decline among Spanish provinces and detailed longitudinal administrative data. The construction workers in heavily exposed provinces suffered a significant decline in total earnings between 2007 and 2012, consistent with the workers experiencing long periods of unemployment rather than wage cuts. I find evidence that the short-term labor market adjustment was intersectoral rather than interregional, even under asymmetric exposure. In order to understand the role of sectoral composition in an individual worker's response to the shock, I construct a reallocation index. This index captures the degree to which workers from the construction sector can reallocate into other sectors. Then, I examine how sectoral composition contributes to ameliorating the shock's impact. I provide evidence that workers' likelihood of changing sectors depends on having better outside opportunities in other sectors, which varies across provinces and workers' characteristics. Individuals with more evenly distributed characteristics across sectors were less affected by the shock because they were more likely to change sectors. This implies that, on average, workers are less likely to adapt to shocks when a region has a high level of sectoral concentration.