Nir Jaimovich, Sergio Rebelo, and Arlene Wong
CQER Working Paper 15-05
November 2015
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The authors 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. Therefore, when households trade down, labor demand falls, increasing the severity of recessions. The authors find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. They 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.
JEL classification: E2, E3, E4
Key words: recessions, quality choice, business cycles
This research was conducted with restricted access to the U.S. Bureau of Labor Statistics (BLS) data. The authors thank our project coordinator at the BLS, Ryan Ogden, for help with the data and Yuriy Gorodnichenko and Michael Weber for making their data and code available to us. The authors also thank Julie Hoffmeyer and Joe Derochowski from the NPD Group for sharing their data with us and David Berger, Guido Menzio, Emi Nakamura, Aviv Nevo, Tommaso Oliviero, Raphael Schoenle, Vincent Sterk, Henry Siu, and Jón Steinsson for their comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Bureau of Labor Statistics. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Nir Jaimovich, Marshall School of Business, University of Southern California and NBER, Department of Finance and Business Economics, Los Angeles, CA 90089, 213 821-4148, njaimo@gmail.com; Sergio Rebelo, Northwestern University, NBER, and CEPR, Kellogg School of Management, 2001 Sheridan Road, Evanston, IL 60208, 847-467-2329, s-rebelo@kellogg.northwestern.edu; or Arlene Wong, Northwestern University, Department of Economics, 2001 Sheridan Road, Evanston, IL 60208, 847-602-3392, arlene.wong@u.northwestern.edu.
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