Sectoral Shocks and Move Unemployment

Abstract

This paper develops a multisector search model in which workers choose their sectors in response to sector-specific and idiosyncratic shocks. Unemployed workers can search for work in their sector of last employment, or become "move unemployed,'' spending extra time in unemployment to reach a new sector. Sectoral shocks induce net movements of labor into relatively productive sectors, while idiosyncratic worker shocks ensure that gross intersectoral flows through unemployment are always positive, a prediction consistent with the data. I use the model to test the sectoral shifts hypothesis (Lilien (1982)) in the context of the Great Recession in which the construction sector experienced a relatively large shock. In a two-sector calibration of the model to construction and non-construction, I find that sectoral dispersion shocks have no impact on aggregate unemployment. While they increase net mobility, this increase is accomplished through a change in the composition of gross flows rather than their level. The results suggest that, a priori, we should not expect sectoral shocks to generate unemployment fluctuations.

JEL Classification: J6