How Important is the Intermediate Goods Channel in Explaining Sectoral Co-Movements over the Business Cycle?

This paper studies a multisector dynamic stochastic general equilibrium model calibrated to the 2-digit SIC level intermediate input-use and capital-use tables to investigate the importance of the intermediate input channel in explaining the sectoral employment comovement over the business cycle. In general, the intermediate input channel is not sufficient to generate the strong business cycle comovement across sectors: it further requires some form of worker's reluctance to substitute labor hours across sectors. For example, as the labor hours become highly substitutable across sectors, some sectors' employment moves in the opposite direction to the aggregate employment. This reflects the key feature of the disaggregated actual input-use and capital-use matrices: only a few sectors serve as important inputs to all other sectors and most sectors use few intermediate inputs in production. Referring to some micro-level studies on the low wage elasticity of labor supply, a low substitution of labor hours is shown to generate the strong business cycle comovement in sectoral hours worked.