A remarkable feature of the current U.S. economic expansion has been its ability to shrug off the adverse effects of financial crises and economic slowdowns around the world for nearly two years. Recently, however, foreign-sector developments have triggered a sizable shift in the sectoral composition of U.S. employment. By early 1999, employment growth in the goods-producing sector had stalled, while employment growth in the service-producing sector was still humming along.
Historically, substantial shifts in labor demand between sectors have been correlated with the business cycle. But recent developments are unusual and highlight our incomplete understanding of this correlation. This article provides new data and evidence on the connection between shifts in labor demand, or job reallocation, and the business cycle. The authors find that all meaningful measures of job reallocation between plants and between industries are significantly countercyclical. They also find econometric evidence that job reallocation may be an important determinant of the natural rate of unemployment, and that dispersion in relative prices may be an important determinant of reallocation.