Job reallocation, idiosyncratic shocks and aggregate fluctuations

This paper shows how idiosyncratic shocks, macro-economic complementarities and a reallocation timing effect, can lead to multiple cyclical output equilibria. When reallocating labor from low productivity plants to high productivity plants takes time and effort which cannot be used for normal production, the best time for an individual firm to reallocate labor is in a recession when demand is low anyway. In the presence of complementarities and positive spillovers, a negative demand shock for one firm will give this firm an incentive to reallocate, but because reallocation itself also leads to lower output this will decrease the demand for the goods of other firms. Therefore those other firms will have an incentive to reallocate as well. After the reallocation process is finished, output will increase again.