Labor reallocation across sectors has become a central mechanism of adjustment in response to asymmetric shocks such as the pandemic, trade and energy disruptions, climate events, and the rise of artificial intelligence. How does reallocation interact with sectoral heterogeneity in unemployment risk, consumption insurance, and production-network linkages, and to what extent is it shaped by countercyclical fiscal policy? In this paper, we first document the magnitude and cyclical behavior of reallocation and the systematic differences across sectors in risk and insurance. We then address these questions through a structural multi-sector New Keynesian model that integrates heterogeneous agents (HANK), search and matching frictions (SAM), and input–output linkages (IO), while allowing workers to endogenously choose the sector in which to search. Calibrated to US data, the model quantifies how labor reallocation amplifies or mitigates the transmission of sectoral shocks and how untargeted fiscal policies, such as unemployment insurance extensions, interact with heterogeneity to shape aggregate demand and unemployment dynamics.