1 The Reallocation of Labour: Theory and Evidence

The reallocation of labour is one of the key functions of labour markets. The large scale turnover of workers called the churn means that this is a huge task. This reallocation is not instantaneous and straightforward because of trading frictions in the labour market. Reallocation matters in a number of ways including for the rate of unemployment and the efficient use of production opportunities. This paper contributes to this research programme by examining the relationship between the churn and the cycle, specifically, aggregate unemployment. There are two important links highlighted in the literature between reallocation, and unemployment and the cycle. In both these views, unemployment plays a positive role in facilitating the reallocation of labour. We argue that this is misleading. In this paper we analyse the reallocation of labour in Britain using theory and evidence. The context has two key components: continuous productivity shocks (so that reallocation is always required) and matching frictions (so that it is not trivial). We calibrate a search and matching model, and use it to explore the relationship between reallocation and the tightness of the labour market using simulations. Turning to the empirical part of the paper, we use data on around 364,000 workers in Britain from the LFS over the period 1993-2001. We analyse reallocation and unemployment, and show a clear negative relationship