Smooth and Sticky Adjustment: a Comparative Analysis of the US and UK

In this paper we adopt the methodology of the micro-econometric labour literature to analyse a common assertion from trade economists that reallocation within sectors is less costly than between sectors. We compare our findings across two countries (the UK and US) which have experienced very different recent aggregate unemployment experiences. We find that workers previously employed in ‘declining’ sectors are more mobile in both countries, and that individuals are more likely to switch sector the longer they are unemployed. A plausible explanation for this is that individuals initially attempt to find jobs that complement their general and specific skills in order to accrue the associated rewards, and only move sector as this prospect diminishes. This would seem to accord with the ‘smooth adjustment hypothesis’ which proposes that intra-industry adjustments are less costly than inter-industry ones.