Sectoral Shifts and Cyclical Unemployment Reconsidered
61 Pages Posted: 24 Jul 2007 Last revised: 18 Jul 2010
Date Written: October 1990
This paper examines the importance of sectoral reallocation and cyclical unemployment; in the postwar US economy. It develops a new measure of reallocation shocks based on the variance of industry stock market excess returns over time, termed cross section volatility. Data on unemployment and vacancies is used to establish that the cross section volatility series is effective in isolating reallocation shocks. The series is then used to measure the contribution of reallocation shocks to aggregate unemployment and to unemployment; of varying durations. On average, about 40 percent of aggregate unemployment is explained by reallocation, but much of the variance of unemployment through time is better explained by cyclical shocks. Reallocation shocks account; for a relatively larger share of long duration unemployment.
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