Trading Down and the Business Cycle

We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consume. Second, the produc- tion of low-quality goods is less labor intensive than that of high-quality goods. Hence, when households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a sub- stantial fraction of the fall in U.S. employment in the recent recession. We then study a general equilibrium model that embeds quality choice and is consistent with our empirical findings.