Why Does Oil Matter? Commuting and Aggregate Fluctuations

37 Pages Posted: 12 Nov 2019 Last revised: 18 Nov 2019

See all articles by Robert C. Ready

Robert C. Ready

University of Oregon - Department of Finance

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Ewelina Zurowska

affiliation not provided to SSRN

Date Written: November 15, 2019

Abstract

Oil price shocks are known to have a sizable macroeconomic impact, despite a relatively small fraction of total expenditures that is devoted to energy. Using micro data we document a significant effect of oil prices on labor supply and commuting distance, especially among low-skilled workers who face large commuting costs, relative to their wages. In addition, equity returns of firms in less skill-intensive industries are more sensitive to oil price fluctuations. Motivated by this empirical evidence, we employ a two-sector endogenous growth model with an oil-dependent commuting friction to examine the effect of oil shocks on employment, real wages, and growth, as well as equity prices. Negative oil supply shocks followed by oil price increases depress labor supply, especially in the less capital-intensive low-skill sector, where employment is most sensitive to the cost of commuting. As a result, output growth slows down in the medium run as innovation and capital are reallocated towards the less affected high-skill sector, resulting in subsequent rise in the skill premium.

Keywords: Oil, Commuting, Labor Supply

JEL Classification: E20, Q43, G10

Suggested Citation

Ready, Robert C. and Roussanov, Nikolai L. and Zurowska, Ewelina, Why Does Oil Matter? Commuting and Aggregate Fluctuations (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3479168 or http://dx.doi.org/10.2139/ssrn.3479168

Robert C. Ready

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ewelina Zurowska

affiliation not provided to SSRN

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