The Short‐Run Relationship Between Sectoral Shifts and U.S. Labor Market Fluctuations

Abstract

Monthly data for the aggregate U.S. economy are used to assess competing hypotheses concerning the relationship between sectoral employment shifts and fluctuations in the unemployment rate. It is shown that sectoral shifts are caused by major work stoppages, aggregate fluctuations unrelated to permanent sectoral shifts, a reallocation‐timing effect, and allocative shocks at the sectoral level. Larger employment shifts are associated with higher unemployment during slow growth periods and lower unemployment during above‐average growth periods. Models are presented which demonstrate that both aggregate and allocative shocks are causes of cyclical increases in unemployment.