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Volatility in productivity and the impact on unemployment


  • William J. Crowder
  • Aaron Smallwood


Volatility, and the uncertainty it creates, has long been recognized as a factor in economic decision making. Since hiring occurs before shocks to productivity are realized, firms’ investment in new labour is inherently risky. How large a role uncertainty in productivity has on aggregate unemployment is an empirical question that we attempt to answer. In this paper we measure the impact of higher volatility in labour productivity on the unemployment rate in the U.S. economy using a SVAR-GARCH-M model. Using the conditional standard deviation of productivity innovations from a multivariate GARCH model to measure uncertainty, we provide compelling evidence that unemployment increases with volatility. This estimated relative effect is actually larger for positive productivity shocks leading to unemployment declines only 60% as large as would have occurred using models that exclude uncertainty.

Suggested Citation

  • William J. Crowder & Aaron Smallwood, 2019. "Volatility in productivity and the impact on unemployment," Applied Economics, Taylor & Francis Journals, vol. 51(56), pages 6034-6039, December.
  • Handle: RePEc:taf:applec:v:51:y:2019:i:56:p:6034-6039
    DOI: 10.1080/00036846.2019.1654079

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    Cited by:

    1. Aaron D. Smallwood, 2022. "Inference in Misspecified GARCH‐M Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 334-355, April.

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