Segment Shifts and Capacity Utilization in the U.S. Automobile Industry

An important school of thought argues that sectoral shifts may account for a substantial portion of aggregate fluctuations (e.g., David Lilien, 1982; Fischer Black, 1987; Steven Davis, 1987). Events such as the oil shocks of the 1970's, exchange-rate fluctuations, and shifts in government spending have their direct effect on the composition of economic activity. The sectoral-shift literature argues that they may affect the level and the dynamics of output and employment as well. The typical story is of a slowly functioning labor market. After a sectoral shock, search behavior, matching problems, and a time cost of switching sectors slow the reallocation of workers across sectors. This focus, however, misses important elements of the reallocation problem. As Black (1987) has argued, not only sector-specific human capital, but also complementary physical and managerial (engineering, organization, etc.) capital must be reallocated or recreated in response to sectoral shocks. If jobs are linked to capital, then the slow adjustment of labor may be attributable in part to the sluggishness in the adjustment of capital. This paper presents an empirical study of the impact of oil-shock sectoral shifts within the U.S. automobile industry. From an analytical perspective, a "sectoral shift" is any event that raises desired output and employment in some "sectors" and lowers them in others. For our purposes, a "sector" is a size class of automobiles. Within the automobile industry, we will be able to study two distinct questions. First, did the oil-priceinduced shocks to the composition of demand interact with short-run rigidities in supply to limit industry-wide capacity utilization? We will quantify the extent to which the changing composition of demand was reflected in a lower aggregate output level, with obvious consequences for the employment of capital and of labor and for the return to firms' knowledge capital. Our second question concerns the pace of the intermediate-run adjustment to sectoral shocks. How rapidly could capital and labor be reallocated to new demand conditions? Such considerations determine the impact of sectoral shocks on employment and capacity-utilization dynamics.