Understanding aggregate job flows

19 Recent empirical work on plant-level employment dynamics, described in Davis, Haltiwanger, and Schuh (DHS, 1996), represents a challenge to conventional ways of thinking about business cycles. The plant-level data provide concrete evidence against the broad applicability of the representative agent construct. Moreover, the behavior of the macro aggregates based on the plant-level data seem hard to reconcile with predictions of the models that dominate the literature on business cycles, which are based on the representative agent paradigm. Although DHS present evidence at the micro and aggregate levels, most of the literature that has developed in response has focused on the aggregate-level evidence. Two of the aggregate variables that have attracted the most attention are the rates of job creation, that is, positive plant-level employment growth, and job destruction, that is, negative plant-level job growth. DHS find that the variance of job destruction in the U.S. manufacturing sector is greater than the variance of job creation and that these variables are negatively correlated (albeit imperfectly). A variety of models have been developed to explain the above observations, which are difficult to reconcile with standard representative-agent models of the business cycle. Examples include Caballero (1992), Caballero and Hammour (1994), Foote (1995), and Mortenson and Pissarides (1994). While this work has Jeffrey R. Campbell is an assistant professor of economics at the University of Rochester and a faculty research fellow at the National Bureau of Economic Research. Jonas D.M. Fisher is an economist at the Federal Reserve Bank of Chicago and an assistant professor at the University of Western Ontario. Understanding aggregate job flows