The Aggregate Effects of Sectoral Reallocations

Can a one-time, permanent change in the fundamentals behind the sectoral composition of the economy prompt an aggregate downturn? Can this downturn be non-negligible, even if one uses US data to determine the relative size of gross vs. net job flows, and the importance of job creation costs? Can one consider the military build-down of the 1990s as a plausible cause for the 1990--1991 recession? Do sectoral reallocations generate responses that are qualitatively similar to `productivity shocks?' We use a variant of the Mortensen--Pissarides (1994. Review of Economic Studies 61, 397--415) job creation/destruction model, calibrate it to US labor market data, and run experiments that suggest one can answer yes to all these questions