Abstract:
This paper develops an equilibrium search and matching model to jointly
study the
aggregate, sectoral, and distributional impacts of labour adjustment.
The model extends Pissarides (2000) to include multisector production and search and
'innovation'
from investments that can potentially improve a match's productivity.
These extensions deliver two mechanisms for inter-sectoral and intra-sectoral
labour reallocation
after shocks. First, because workers search simultaneously in multiple
sectors, changes
in labour market conditions in one sector propagate to impact wages and
hiring in
the rest of the economy through a reservation wage effect.
Second, a
positive productivity shock causes firms to invest more resources in innovation.
This innovation
effect shifts production towards high-skill jobs and amplifies the
impact of productivity
shocks relative to the baseline model. I show that the model is useful
for analyzing
labour adjustments caused by a diverse set of factors including:
technological change;
persistent energy price and exchange rate shocks; and trade
liberalization. Finally, because the transition dynamics between steady-states are tractable, the
model can be
readily-applied to the data to study particular labour adjustment
episodes.