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Job Reallocation and the Business Cycle: New Facts for an Old Debate

By Scott Schuh and Robert K. Triest


Can the reallocation of factors of production among firms and sectors, or the restructuring of production technology, cause business cycle fluctuations? Theoretically, the answer is unequivocally “yes. ” But do reallocation and restructuring actually cause fluctuations? The answer to this question—like most questions about economic causality—is much less clear. Indeed, determining whether or not reallocation and restructuring cause fluctuations is as fundamentally difficult as identifying supply and demand. The purpose of this paper is to examine the relationship between the business cycle and reallocation and restructuring, with a particular emphasis on trying to learn whether reallocation causes recessions. We conduct our investigation by briefly assessing existing evidence and theories of reallocation and restructuring, and then providing new evidence designed to improve our understanding of the relationship. Held a generation ago, this conference probably would not have included a session devoted to understanding the role of reallocation and restructuring (henceforth, simply “reallocation”) in business cycle fluctu

Year: 1998
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