This paper investigates the impact of service outsourcing on sectoral labor productivity in the U.S. over the period 1963-2019. I observe that service-related sectors have substantially increased their central positions as input suppliers in the U.S. economy, and it is where most of the service outsourcing activity is concentrated. Outsourcing refers to a situation where firms or industries contract out particular types of jobs, such as accounting, data analyzing, and cleaning, to specialized companies rather than produce them in-house. Moreover, I determine a significant positive relationship between movements in employment in service sectors and changes in their inputs supplied. The fact implies that this structural transformation induces the reallocation of employment across industries. Therefore, it might also influence sectoral (or service) labor productivity. To account for these sectoral movements, I incorporate the input-output network into a multisector real business cycle model to quantitatively gauge the changes in the composition of intermediate inputs and their sourcing mode to labor productivity.

Hulton’s Theorem argues that in the presence of input-output linkages, the impact of a sector-level shock on the aggregate economy is entirely captured by its size, regardless of its position in the production network. This paper proposes the idea that the production network in isolation represents an essential channel in shaping macroeconomic fluctuations in the United States. First, based on the data from the Bureau of Economic Analysis (BEA) input-output account, this paper shows that as the empirical production network is getting sparser over the past five decades, namely, a majority of industries are dominated by a few central input suppliers, GDP growth tends to decline and is more volatile. Motivated by these facts, this paper embeds the input-output network into a multisector real business cycle model with constant elasticity of substitution (CES) technologies. In order to highlight the role of the input-output network, this paper characterizes sectoral total factor productivity (TFP) shocks’ impact on macroeconomic aggregates nonlinearly. Finally, this paper measures realized sector-level productivity shocks from the data, feeds them into the model, and observes that the calibrated model can quantitatively generate observed empirical patterns. Overall, this paper tests the role of the production network structure in deciding aggregate fluctuations and shows it to be empirically and quantitatively important.

This paper concentrates on identifying the potential origin of business cycle fluctuations in China during the 2007-2009 recession. First, I document that domestic loans are countercyclical to GDP in China, revealing a link between the financial market and the real economy. Next, I employ a standard real business cycle model that allows financial asset trading between firms and households and imposes restrictions on firms’ credit constraints. Specifically, I measure the financial shocks as the residuals of a firm’s enforcement constraint. As assumed in the model that payments to labor need to be made before the realization of revenues, firms might need to raise funds with intra-period loans to fill liquidity shortages in between two periods. However, during recessions, firms can neither obtain enough indirect finance from banks nor convert capital assets into liquidity within a short time horizon. As a result, firms have to cut budget constraints by laying off workers. To calibrate key parameters fitting characteristics in China’s economy, I combine macroeconomic data from the National Bureau of Statistics of China (NBS) and financial data in the China Stock Market and Accounting Research (CSMAR) database. Then, I solve systematic equations of the dynamic stochastic general equilibrium (DSGE) model analytically and quantitatively with Dynare. This paper finds that financial shocks can explain about 66% of GDP fluctuations during the 2007-2009 recession. Therefore, financial frictions are the main driving force of macroeconomic fluctuations in China during the recent Financial Crisis through the real economic factor, labor.