Unemployment and Endogenous Reallocation over the Business Cycle

This paper studies the extent to which the cyclicality of occupational mobility shapes that of aggregate unemployment and its duration distribution. We document the relation between workers’ occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop a multi-sector business cycle model with heterogenous agents. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among many others. Our analysis shows that occupational mobility due to workers’ changing career prospects, and not occupation-wide differences, interacts with aggregate conditions to drive the fluctuations of the unemployment duration distribution and the aggregate unemployment rate.