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Explaining unemployment: sectoral vs aggregate shocks

  • Prakash Loungani
  • Bharat Trehan

We include a stock market-based measure of sectoral shocks in a small VAR to examine the role played by these shocks in explaining the behavior of the unemployment rate. Sectoral shocks explain a significant proportion of the variation in the unemployment rate - especially the long-duration unemployment rate - even though other kinds of shocks (such as shocks to monetary policy, defense expenditures, and oil prices) are allowed to affect the unemployment rate. A historical decomposition reveals that recession, and they explain only a modest part of the rise in unemployment over the 1990 recession.

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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1997)
Issue (Month): ()
Pages: 3-15

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Handle: RePEc:fip:fedfer:y:1997:p:3-15:n:1
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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  3. Brainard, S Lael & Cutler, David M, 1993. "Sectoral Shifts and Cyclical Unemployment Reconsidered," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 219-43, February.
  4. Katharine G. Abraham & Lawrence F. Katz, 1984. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," NBER Working Papers 1410, National Bureau of Economic Research, Inc.
  5. Toledo, Wilfredo & Marquis, Milton H, 1993. "Capital Allocative Disturbances and Economic Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 233-40, May.
  6. Campbell, Jeffrey R. & Kuttner, Kenneth N., 1996. "Macroeconomic effects of employment reallocation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 87-116, June.
  7. Thomas, Jonathan M, 1996. "An Empirical Model of Sectoral Movements by Unemployed Workers," Journal of Labor Economics, University of Chicago Press, vol. 14(1), pages 126-53, January.
  8. Robert G. Valletta, 1996. "Has job security in the U.S. declined?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb16.
  9. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. John H. Cochrane, 1994. "Shocks," NBER Working Papers 4698, National Bureau of Economic Research, Inc.
  11. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  12. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
  13. Davis, Steven J., 1987. "Fluctuations in the pace of labor reallocation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 335-402, January.
  14. Loungani, Prakash, 1986. "Oil Price Shocks and the Dispersion Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 536-39, August.
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