Linnea Lorentzen, Norwegian Business School (Job Market Seminar)

"Domino Effects: Understanding Sectoral Reallocation and its Wage Implications"

Abstract

How do sector-specific shocks induce workers to move between sectors, and what is the impact on the distribution of earnings? While we know that sector-specific shocks affect workers in directly exposed sectors, less is known about the equilibrium effects on indirectly exposed workers. This paper studies how shocks hitting one sector can, mediated through sectoral reallocation, impact workers across sectors. Specifically, I study the sectoral reallocation in Norway, driven by the collapse in the price of Brent Crude Oil in 2014. The data shows the worker reallocation to be asymmetric; the oil workers moved into certain destination sectors in particular. By exploiting variation in into which sectors oil workers had been moving pre-shock, I provide novel empirical evidence on how workers in sectors more exposed to worker inflows experienced a relative reduction in earnings growth and an increased probability of leaving their sector. To quantify the equilibrium effects, I employ a Roy model of sectoral reallocation where sectoral skills are distributed log-normally and correlated across sectors. I calibrate the skill correlations by targeting the sectoral reallocation observed in the data. The model simulates the counterfactual reallocation driven by the shock in isolation and quantifies the magnitude of the equilibrium effects. The quantitative results show that, on average, across local non-tradable sectors, the shock is associated with a real wage decline of 10% of the oil sector real wage decline, with a maximum of 66%.

Contact person: Anders Munk-Nielsen