Uncertainty and Unemployment: The Effects of Aggregate and Sectoral Channels

We study the role of uncertainty shocks in explaining unemployment dynamics, separatingout the role of aggregate and sectoral channels. Using S&P500 data from the first quarter of1957 to third quarter of 2014, we construct separate indices to measure aggregate andsectoral uncertainty and compare their effects on the unemployment rate in a standardmacroeconomic vector autoregressive (VAR) model. We find that aggregate uncertaintyleads to an immediate increase in unemployment, with the impact dissipating within a year.In contrast, sectoral uncertainty has a long-lived impact on unemployment, with the peakimpact occurring after two years. The results are consistent with a view that the impact ofaggregate uncertainty occurs through a "wait-and-see" mechanism while increased sectoraluncertainty raises unemployment by requiring greater reallocation across sectors.
Publication date: February 2015
ISBN: 9781498356305
$18.00
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , aggregate uncertainty , sectoral uncertainty , unemployment , stock market , Great Recession

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