The Allocation of Talent over the Business Cycle and its Long-Term Effect on Sectoral Productivity

Recent research in labor economics has highlighted the substantial and long-lasting adverse effect of recessions on employment prospects and earnings. In this paper, we study whether individuals react to these shocks by changing career paths, thereby affecting the distribution of talent between sectors. More concretely, we examine how publications and career choices of graduates from the leading US economics PhD programs vary with the state of the business cycle at time of application and at time of graduation. Our results strongly support the predictions of a Roy-style model of self-selection into sectors: we find that adverse macroeconomic conditions at time of application lead to a substantially more productive selection of individuals into academia and at time of graduation they lead to more PhDs deciding to stay in academia