Working Paper: NBER ID: w1410
Authors: Katharine G. Abraham; Lawrence F. Katz
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.
Keywords: cyclical unemployment; sectoral shifts; aggregate demand
JEL Codes: J64; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dispersion of employment growth rates (J69) | Unemployment rate (J64) |
| Aggregate demand fluctuations (E39) | Dispersion of employment growth rates (J69) |
| Aggregate demand fluctuations (E39) | Unemployment rate (J64) |
| Change in unemployment rate (J64) | Dispersion of employment growth rates (J69) |
| Help Wanted Index (J68) | Unemployment rate (J64) |
| Sectoral shifts (L16) | Unemployment rate (J64) |