Oil price shocks and US unemployment: evidence from disentangling the duration of unemployment spells in the labor market

This paper examines how structural oil price shocks affect the US unemployment at the aggregate level and across the duration of unemployment spells. I find that adverse oil supply shocks produce a recessionary effect by significantly increasing the aggregate unemployment measures and the number of persons unemployed for 5 weeks or more. Aggregate demand shocks increase unemployment with a lag of a year and show a short-run fall in the number of unemployed between 5 and 26 weeks. While precautionary demand shocks have a muted effect on the unemployment rate, they temporarily raise short-term spells of unemployment but drop the number of unemployed between 5 and 26 weeks. Additionally, aggregate demand shocks are essential in explaining the duration of unemployment during the oil price surge of 2003–2008, the Great Recession, and the 2010–2014 period of stable oil prices. The findings also reflect that supply-driven shocks played a more important role in long-term unemployment during the 1970s–1980s period, whereas demand-driven shocks dominated the labor market during later periods of the 2000s.