This thesis uses a macroeconomic approach to study labour adjustments following sector-specific shocks. I develop a general model, investigate its dynamic adjustment process and apply it to study the Canadian economy in 2002–2006. This episode is an interesting case study because it features a significant labour reallocation to the resource sector and away from manufacturing, precipitated by an increase in global commodity prices and an associated exchange rate appreciation. The results establish that impediments to the adjustment process are economically significant in the aggregate for this episode, imposing costs of up to three percent of output during the transition. These findings augment several studies that suggest individual workers can face large and persistent earnings losses during job turnover. However, unlike previous research, I use the search and matching approach — which incorporates explicit labour market frictions — to uncover the sources of these costs for the macroeconomy. The findings emphasize that job loss itself is not particularly important quantitatively, but rather the non-transferability of skills during job turnover is a key concern. Finally, I investigate how labour market policy impacts the economy’s response to sector-specific shocks by analyzing a counterfactual policy change in unemployment benefits and improved skill acquisition through faster learning and training subsidies. The results reveal interesting policy trade-offs. First, I find that increasing unemployment benefits prolongs the economy’s adjustment, reduces employment, output and welfare and increases unemployment incidence and duration. However, because this policy impacts high-productivity and low-productivity sectors differently, it shifts the composition of the remaining jobs towards high-productivity sectors, thereby raising aggregate productivity and also reduces wage inequality. Second, I find that faster skill acquisition has the potential to deliver large economic gains in the long-run, but requires up-front investment costs which entail reduced economic performance in the short-run. / Thesis (Ph.D, Economics) -- Queen's University, 2008-08-05 23:44:39.827