Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?

47 Pages Posted: 11 Apr 2004

See all articles by Katharine G. Abraham

Katharine G. Abraham

University of Maryland - Joint Program in Survey Methodology and Department of Economics; National Bureau of Economic Research (NBER)

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1984

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.

Suggested Citation

Abraham, Katharine G. and Katz, Lawrence F., Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances? (July 1984). NBER Working Paper No. w1410, Available at SSRN: https://ssrn.com/abstract=282678

Katharine G. Abraham (Contact Author)

University of Maryland - Joint Program in Survey Methodology and Department of Economics ( email )

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Lawrence F. Katz

Harvard University - Department of Economics ( email )

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HOME PAGE: http://www.economics.harvard.edu/faculty/katz/katz

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