Domino Effects: Understanding Sectoral Reallocation and its Wage Implications

This paper studies how the 2014 collapse in Brent Crude Oil prices propagated through the Norwegian labor market via worker reallocation. Using Norwegian panel data, I show that workers in non-tradable sectors more exposed to inflows of displaced oil workers experienced significant earnings declines and higher rates of sector exit, documenting a key propagation channel that extends the reach of sectoral shocks beyond the directly affected sector. To quantify the full network of equilibrium adjustments, I estimate a multisector Roy model with correlated sectoral skills and mobility costs. Counterfactual simulations show that non-tradable sector wages declined by up to 32% of the oil sector's wage loss. The magnitude of net worker reallocation between non-oil sectors was equivalent to 63% of the net outflow from the oil sector in the median commuting zone. The model shows how a single sectoral shock can trigger economy-wide labor market adjustment through worker movements. The simulations further reveal that the domino reallocation acts as an equalizing force: shutting it down amplifies both mean wage spillovers and wage dispersion within and across commuting zones.