Lost in transition: the costs and consequences of sectoral labour adjustment

Abstract This paper uses an equilibrium search and matching model to study Canada’s sectoral labour adjustment in 2002–2006 during an increase in global commodity prices and exchange rate appreciation. I estimate economically significant adjustment costs for the aggregate economy in this episode and demonstrate that difficulty in transferring skills between jobs for individual workers can be an important contributor to these aggregate costs. The analysis also demonstrates that the level of unemployment benefits impacts the economy’s sectoral composition, its aggregate productivity, and the speed of its adjustment to shocks.