Uncertainty and unemployment: The effects of aggregate and sectoral channels

Sangyup Choi and Prakash Loungani

Journal of Macroeconomics, 2015, vol. 46, issue C, 344-358

Abstract: We explore the role of uncertainty shocks in explaining unemployment dynamics over the time period 1963–2014. The novelty of our approach is that we distinguish between aggregate and sectoral channels of uncertainty and compare their effects on the unemployment rate. Using S&P500 data we construct both an aggregate measure of time-series volatility in stock returns and a sectoral measure of cross-industry uncertainty in stock returns. We find that an increase in aggregate uncertainty leads to an immediate increase in unemployment, only lasting for three quarters. An increase in sectoral uncertainty leads to a longer-lasting increase in unemployment, with the peak impact occurring after two years. The combination of the two channels can account for the unemployment experience during periods such as the Great Recession when unemployment increased sharply at the outset and remained persistently high. The results are based on a standard macroeconomic vector autoregressive model and are shown to be robust to various checks, as well as to the use of other techniques such as a local projection method.

Keywords: Aggregate uncertainty; Sectoral uncertainty; Unemployment; Great recession; Vector autoregressions; Local projection (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 J64 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Working Paper: Uncertainty and Unemployment: The Effects of Aggregate and Sectoral Channels (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:46:y:2015:i:c:p:344-358

DOI: 10.1016/j.jmacro.2015.10.007

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