How important is the intermediate input channel in explaining sectoral employment comovement over the business cycle?

This paper investigates both analytically and quantitatively the role of intersectoral linkages in explaining sectoral employment comovement over the business cycle. We use a multisector dynamic stochastic general equilibrium model calibrated to the 2-digit SIC level intermediate input-use and capital-use tables and sectoral productivity shocks. With indivisible labor implying constant marginal utility of leisure, intersectoral linkages at the disaggregated level generate strong employment comovement across sectors. With divisible labor, however, procyclical marginal utility of leisure can dominate intersectoral linkages, implying some negative comovement. It further requires some form of the difficulty in reallocating labor across sectors, so that the substitutability of labor supply across sectors is relatively low. With divisible labor, a limited substitution of labor hours across sectors is shown to generate strong employment comovement over the business cycle. (c) 2006 Elsevier Inc. All rights reserved.