During a recession, consumers trade down in the quality of the goods and services they buy — and because lower- quality products are generally less labor-intensive, this trading down reduces the demand for labor and increases unemployment, argues a study by Nir Jaimovich at the University of Southern California and Sergio Rebelo and Arlene Wong at Northwestern University. Their calculations suggest that 22% to 36% (depending on the measure of quality used and the data set) of the decline in employment during the 2007-2012 period is accounted for by consumers trading down in the quality of the goods and services they bought.

(Source: National Bureau of Economic Research)

Published in Dawn, Business & Finance weekly, February 8th, 2016