Why Does Employment in All Major Sectors Move Together over the Business Cycle? (Job Market Paper) In recessions, employment falls in all major sectors. Positive correlation of employment across sectors is a puzzle,
because a 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 extensive 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 novel
two sector model with search and matching friction, capital
adjustment 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.
International Business Cycles with Search and Sticky Wages Labor input, investment, and output are positively correlated across many developed countries at business cycle frequencies.
A frictionless two-goods-two-countries model predicts negative correlations of hours worked and investment across countries.
I incorporate a search and matching friction and partial wage stickiness into a two-goods-two-countries model. The model generates positive correlations of hours
worked and output and higher correlations of investment across countries.
These results partially resolve the "international co-movement puzzle" described in Baxter (1995) and Backus, Kehoe, and Kydland (1995).
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