IMF Working Papers

Uncertainty and Unemployment: The Effects of Aggregate and Sectoral Channels

Author/Editor:

Sangyup Choi ; Prakash Loungani

Publication Date:

February 23, 2015

Electronic Access:

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Summary:

We study the role of uncertainty shocks in explaining unemployment dynamics, separating out the role of aggregate and sectoral channels. Using S&P500 data from the first quarter of 1957 to third quarter of 2014, we construct separate indices to measure aggregate and sectoral uncertainty and compare their effects on the unemployment rate in a standard macroeconomic vector autoregressive (VAR) model. We find that aggregate uncertainty leads 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 peak impact occurring after two years. The results are consistent with a view that the impact of aggregate uncertainty occurs through a “wait-and-see” mechanism while increased sectoral uncertainty raises unemployment by requiring greater reallocation across sectors.

Series:

Working Paper No. 2015/036

Subject:

Financial crises Financial markets Global financial crisis of 2008-2009 Labor Labor markets Stock markets Unemployment Unemployment rate Vector autoregression