Fluctuations of unemployment and inter- and intra-sectoral reallocations of workers

Abstract

This paper investigates how both inter- and intra-sectoral reallocations of workers contribute to fluctuations in the aggregate unemployment rate. On the basis of the Panel Study of Income Dynamics (PSID) data for the 1986–96 period, we construct a monthly longitudinal data set that enables us to track each individual's experience of unemployment duration as well as labor movement across and within sectors. This data set shows strong evidence that inter-sectoral reallocations of workers play a major role in explaining fluctuations in the unemployment rate at the business cycle frequency. While the number of intra-sectoral movers is generally greater and more countercyclical than that of inter-sectoral movers, the longer duration of unemployment of the latter enables the impact of inter-sectoral movements to be more pronounced in explaining fluctuations in the unemployment rate. Moreover, the asymmetric effects that increase, rather than decrease, in unemployment are by far better explained by inter-sectoral movers, which suggests that high unemployment is closely associated with inter-sectoral reallocations of workers.