Working Paper: NBER ID: w21539
Authors: Nir Jaimovich; Sergio Rebelo; Arlene Wong
Abstract: We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consumed. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. When households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We show that embedding quality choice in a business-cycle model improves the model's amplification and comovement properties.
Keywords: Business Cycle; Labor Demand; Quality Choice; Great Recession
JEL Codes: E1; E2; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading down (F19) | decline in labor demand (J23) |
| decline in labor demand (J23) | exacerbation of recession (E65) |
| trading down (F19) | reduction in labor demand (J23) |
| reduction in labor demand (J23) | severity of recession (F44) |
| trading down (F19) | fall in employment (J63) |
| negative income shock (F61) | trading down (F19) |
| trading down (F19) | procyclical employment effects (E24) |