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Abstract
We study how the sectoral backgrounds of an individual’s current coworkers influence job-switching decisions and shape labor reallocation across sectors. To identify causal effects, we employ multiple strategies, including distinguishing between current-year and non-current-year coworkers, controlling for time-varying shocks specific to the industry pairs, and using unexpected death or retirement events to isolate idiosyncratic changes in coworker networks. Using German administrative matched employer-employee longitudinal data, we find a positive causal relationship between the proportion of coworkers from a sector and both the propensity of transitioning to that sector and the sensitivity to sectoral wage changes. To quantify the coworker mechanism’s contribution to employment and reallocation, we develop and estimate a multi-sector, multi-firm general equilibrium model where perceived wages and adjustment costs for sector transitions depend on coworker shares. Our results show that the welfare effect of COVID-induced productivity shocks is higher when considering coworker networks compared to assuming no influence from coworkers. Maintaining worker-employer ties to reduce competition in positively shocked sectors can further increase welfare.