This paper revisits the sectoral shifts hypothesis by examining unemployment fluctuations for 48 U.S. states\udover the period 1990:01–2011:12. We develop a panel approach that incorporates dynamics, parameter\udheterogeneity, aggregate factors and cross-sectional dependence. Our findings provide support for a positive\udand significant effect of the employment dispersion index on unemployment. This outcome is robust under alternative specifications and measures of employment dispersion. The empirical evidence corroborates the presence and relevance of cross-sectional dependence and heterogeneity among states. The results show that, once unobserved common factors and cross-state heterogeneity are taken into account, labor reallocation has a significant effect on unemployment that is half the size of the estimate when cross sectional dependence is not taken into account.
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