Working Paper: CEPR ID: DP10807
Authors: Nir Jaimovich; Sergio Rebelo; Arlene Wong
Abstract: We document two facts. First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. So, when households trade down, labor demand falls, increasing the severity of recessions. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the response of these economies to real and monetary shocks.
Keywords: business cycle; quality choice; recessions
JEL Codes: E2; E3; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading down in quality (L15) | decrease in labor demand (J23) |
| decrease in labor demand (J23) | increase severity of recessions (F44) |
| trading down in quality (L15) | increase severity of recessions (F44) |
| quality choice (L15) | labor demand (J23) |
| trading down in quality (L15) | lower quality goods production (L15) |