Oil price uncertainty and unemployment dynamics: Nonlinearities matter

Using a logistic smooth transition autoregressive process for the monthly U.S. unemployment rate with oil price uncertainty as a transition variable, we investigate the impact of high and low oil price uncertainty states on the unemployment rate. We find that the unemployment rate rises and is more persistent in a high oil price uncertainty state than in a low oil price uncertainty state. Additionally, our analysis of generalized impulse response functions shows that an oil price uncertainty shock increases the unemployment rate in the high oil price uncertainty state but has no significant effect in the low oil price uncertainty state. The asymmetric response of the unemployment rate varies depending on the sign and size of the shocks and is contingent upon the initial history of the economy. Our findings are robust to different specifications and suggest that policymakers should consider these relationships and take a more nuanced approach to policies designed to mitigate the adverse impact of oil price uncertainties on the labor market.