We estimate cyclicality in labor’s user cost allowing for cyclical fluctuations in the quality of worker-firm matches and wages that are smoothed within employment matches. To do so, we exploit a match’s long-run wage to control for its quality. Using 1980–2019 National Longitudinal Survey of Youth data, we identify three channels by which recessions affect user cost: they lower the new-hire wage and wages going forward in the match, but they also result in higher subsequent separations. We find that labor’s user cost is highly procyclical, increasing by more than 4% for a 1 percentage point decline in unemployment.

We use regional variation in the American Recovery and Reinvestment Act (2009–12) to analyse the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in the Nielsen scanner data and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases local non-durable consumer spending by $0.29 and local auto spending by $0.09. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, new Keynesian model with heterogeneous agents, incomplete markets, and trade linkages. Our model is consistent with the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. At the zero lower bound, the aggregate consumption multiplier is twice as large as the local multiplier because trade linkages propagate the effect of government spending across regions.