NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trading Down and the Business Cycle

Nir Jaimovich, Sergio Rebelo, Arlene Wong

NBER Working Paper No. 21539
Issued in September 2015, Revised in October 2017
NBER Program(s):Economic Fluctuations and Growth

We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consumed. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. When households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We show that embedding quality choice in a business-cycle model improves the model's amplification and comovement properties.

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Document Object Identifier (DOI): 10.3386/w21539

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