A Tale of Two Countries

A Comparison of the Aggregate Effects of Sectoral Reallocation in the United States and Germany

This paper compares the aggregate effects of sectoral reallocation in the US and Western Germany using a stochastic volatility model of sectoral employment growth. Reallocative shocks have no effect on the natural rate of unemployment in either country, and there is mild evidence that reallocative shocks are contractionary over the cycle. The overall statistical contribution of such shocks to the cycle, however, is limited. Reallocative shocks do not appear to be to blame for the rise in trend unemployment in Germany in the 1980s or for a possible rise in trend unemployment in the US following the Great Recession.

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