UC Santa Cruz

The motivation of my dissertation research has been to develop a better understanding of the mechanisms behind business cycle fluctuations in employment and firm dynamics. I have an interest in these issues not only because I find business cycle phenomena interesting, but because it is crucial in designing economic policies that can help mitigate the severity of recessions. To answer these questions my dissertation research has focused on outcomes and behavior at the individual and firm level.

My first chapter is focused on firm dynamics over the business cycle. Growth rates of firms' employment and revenues becomes more disperse during recessions. Existing research on this business cycle phenomena has focused on information and frictions present on the firms' side of the economy. I argue that this increase in dispersion in firm-level growth rates can arise from changes in consumer behavior over the business cycle. The key link between consumer behavior and the dispersion of firm-level growth rates is demand elasticity: when demand elasticity is high, a cost shock has a larger impact on a firms' sales and employment, relative to when demand elasticity is low. Using a UPC-level data set of prices and quantities at retail stores and a panel of household purchases, I find evidence that demand elasticity rises during recessions. Consistent with changing demand elasticity, the dispersion of stores' growth rates increases during recessions and this increase is larger in markets where the change in consumer behavior is the strongest. To assess the the importance of this mechanism I construct a business cycle model with heterogeneous firms and frictions in product markets. In the model, it is costly for households to obtain the best prices in the market, and more shopping effort translates into lower consumption prices. With this margin of adjustment available, households increase shopping effort during recessions to obtain lower prices as a means to mitigate their fall in consumption. This behavior changes the demand elasticity faced by firms, leading to countercyclical dispersion. The model generates countercyclical shopping effort, procyclical relative consumption prices, and countercyclical dispersion, all of which are observed empirically. The baseline calibration of the model is able to generate countercyclical dispersion that is roughly one third of that observed empirically.

My second and third chapters focus on unemployment fluctuations over the business cycle. Traditional models of unemployment struggle to reproduce the persistence of unemployment fluctuations observed over the business cycle. In my second chapter, I extend a traditional search and matching model of unemployment to capture skill acquisition over a normal working life. The model shows that recessions that are characterized by human capital loss lead to slow recoveries in unemployment. My third dissertation chapter examines the relationship between the characteristics of the pool of unemployed workers and the pace of unemployment recoveries. Using monthly U.S. census data I examine unemployed workers' reported reason for unemployment and how these workers differ in their subsequent job-finding rates. I find that workers who have been permanently displaced from their previous jobs with no expectation of recall have drastically lower job-finding rates than those on temporary layoffs and other reasons for unemployment. I show that recent recessions have been characterized by a stronger compositional shift towards these low job-finding rate permanent displacements, especially relative to earlier post-war recessions. These stronger compositional changes are an important factor behind slow unemployment recoveries in recent U.S. recessions. I find that this shift is due, in part, to the changing industrial landscape in the U.S., moving towards a professional and service-oriented economy and away from production-oriented industries.