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Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?

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  • Abraham, Katharine G
  • Katz, Lawrence F

Abstract

Recent work by David Lilien has argued that the existence of a strong positive correlation between the dispersion of employment growth rates across sectors (G) and the unemployment rate implies that shifts in demand from some sectors to others are responsible for a substantial fraction of cyclical variation in unemployment. This paper demonstrates that, under certain empirically satisfied conditions, aggregate demand movements alone can produce a positive correlation between G and the unemployment rate. Two tests are developed which permit one to distinquish between a pure sectoral shift interpretation and a pure aggregate demand interpretation of this positive correlation. The finding that G and the volume of help wanted advertising are negatively related and the finding that G is directly associated with the change in unemployment rather than with the level of unemployment both support an aggregate demand interpretation. A proxy for sectoral shifts that is purged of the influence of aggregate demand is then developed. Models which allow sectoral shifts in the composition of demand and fluctuations in the aggregate level of demand to affect the unemployment rate independently are estimated using this proxy. The results support the view that pure sectoral shifts have not been an important source of cyclical fluctuations in unemployment.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 94 (1986)
Issue (Month): 3 (June)
Pages: 507-22

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Handle: RePEc:ucp:jpolec:v:94:y:1986:i:3:p:507-22

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  1. Robert J. Barro & Mark Rush, 1979. "Unanticipated Money and Economic Activity," NBER Working Papers 0339, National Bureau of Economic Research, Inc.
  2. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
  3. Jackman, R & Layard, Richard & Pissarides, C, 1989. "On Vacancies," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(4), pages 377-94, November.
  4. Sherwin Rosen, 1983. "Unemployment and Insurance," NBER Working Papers 1095, National Bureau of Economic Research, Inc.
  5. Charles Holt & Martin David, 1966. "The Concept of Job Vacancies in a Dynamic Theory of the Labor Market," NBER Chapters, in: The Measurement and Interpretation of Job Vacancies, pages 73-110 National Bureau of Economic Research, Inc.
  6. Abraham, Katharine G, 1983. "Structural-Frictional vs. Deficient Demand Unemployment: Some New Evidence," American Economic Review, American Economic Association, vol. 73(4), pages 708-24, September.
  7. Barro, Robert J, 1984. "Rational Expectations and Macroeconomics in 1984," American Economic Review, American Economic Association, vol. 74(2), pages 179-82, May.
  8. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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  1. Using Beveridge curve dynamics to identify cyclical and structural shocks
    by David Andolfatto in MacroMania on 2012-01-24 16:45:00
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