The aggregate effects of sectoral reallocations

Can a one-time, permanent change in the fundamentals behind the sectoral composition of the economy prompt an aggregate downturn? Can this downturn be nonnegligible, even if one uses US data to determine the relative size of gross vs. net job flows, and the importance of job creation costs? Can one consider the military build-down of the 1990s as a plausible cause for the 1990-1991 recession? Do sectoral reallocations generate responses that are qualitatively similar to 'productivity shocks'? We use a variant of the Mortensen-Pissarides (1994, Review of Economic Studies 61, 397-415) job creation/destruction model, calibrate it to US labor market data, and run experiments that suggest one can answer yes to all these questions. (C) 2000 Elsevier Science B.V. All rights reserved.