Uncertainty and Unemployment: The Effects of Aggregate and Sectoral Channels

Abstract

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.

Macroeconomic Uncertainty and Capital-Skill Complementarity

“…Part of this literature, which considers the implications of uncertainty on labor market is more scarce. Empirically work (see Caggiano and Groshenny (2014), Choi and Loungani (2015), Leduc and Liu (2016)) shows that a rise in aggregate uncertainty increases unemployment. Theoretical literature has shown that labor market frictions amplify the effects of uncertainty similar to investment irreversibility through the real option-value channel in the labor market.…”

“…Caggiano and Groshenny (2014) andChoi and Loungani (2015) are examples of previous studies that found the importance of this channel.©International Monetary Fund. Not for Redistribution…”

“…I start the analysis by estimating a structural vector autoregression (SVAR) model of quarterly macroeconomic and labor market variables, and the macroeconomic uncertainty index of Jurado, Ludvigson, and Ng (2015) for the United States, using data from the Current Population Survey Merged Outgoing Rotation Groups (CPS MORG) to construct quarterly measures of wage and employment rates for college educated and non-college educated workers for the sample period 1979Q1-2018Q4. I find that macroeconomic uncertainty shocks increase the employment rate gap between skilled and unskilled workers 1 Part of this literature studies the impact of uncertainty on unemployment, but considering aggregate labor market (Caggiano and Groshenny (2014), Choi and Loungani (2015), Schaal (2017), Leduc and Liu (2016), Cacciatore and Ravenna (2020), Guglielminetti (2016), and Leduc and Liu (2016)). 2 The skill premium is defined as the ratio of a skilled wage to an unskilled wage.…”