Domino Effects: Understanding Sectoral Reallocation and its Wage Implications

Linnea Lorentzen

No 26172, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

Abstract: This paper studies how the 2014 collapse in Brent Crude Oil prices propagated through the Norwegian labor market via worker reallocation. Using Norwegian panel data, I show that workers in non-tradable sectors more exposed to inflows of displaced oil workers experienced significant earnings declines and higher rates of sector exit, documenting a key propagation channel that extends the reach of sectoral shocks beyond the directly affected sector. To quantify the full network of equilibrium adjustments, I estimate a multisector Roy model with correlated sectoral skills and mobility costs. Counterfactual simulations show that non-tradable sector wages declined by up to 32% of the oil sector's wage loss. The magnitude of net worker reallocation between non-oil sectors was equivalent to 63% of the net outflow from the oil sector in the median commuting zone. The model shows how a single sectoral shock can trigger economy-wide labor market adjustment through worker movements. The simulations further reveal that the domino reallocation acts as an equalizing force: shutting it down amplifies both mean wage spillovers and wage dispersion within and across commuting zones.

Keywords: Sectoral shocks; Reallocation; Local labor markets; Wages; Inequality (search for similar items in EconPapers)
JEL-codes: E24 F16 F62 F66 J24 J31 (search for similar items in EconPapers)
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:crm:wpaper:26172

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