Sectoral shocks and their impacts on cyclical co-movements and aggregate employment

This paper investigates if the sectoral shifts hypothesis initiated by Lilien (1982) can be also satisfactorily explained by a multi-sectoral RBC (real business cycle) model invented mainly to explain business cycle co-movements across sectors. While the sectoral shifts hypothesis emphasizes asymmetric shocks across sectors that lead to sectoral redistribution of workers and lowered total employment, the RBC model tries to explain sectoral co-movements of output through sectoral linkages of intermediate and investment goods. We confirm that the sectoral shifts hypothesis is strongly supported by the Jorgenson's 35 industry data. We have adopted Horvarth (2000)'s model to simulate the artificial data and applied the same regression equation to test if the model is also consistent the sectoral shifts hypothesis. We find that the model can successfully explain the empirical findings of the sectoral shifts hypothesis when the adjustment costs of labor across sectors is weak.