Academic journal article Atlantic Economic Journal

The Impact of Sectoral Shifts in Investment on Unemployment in U.S. Labor Markets

Academic journal article Atlantic Economic Journal

The Impact of Sectoral Shifts in Investment on Unemployment in U.S. Labor Markets

Article excerpt

PAUL R. BLACKLEY [*]

Capital stock data for the U.S. economy are used to develop a measure of sectoral shifts in productive resources. Within the context of the creative destruction process, this measure provides a direct indicator of sectoral shifts in resource demands independent of aggregate fluctuations. Years with greater reallocations of capital have higher unemployment, a result consistent with the traditional sectoral shifts hypothesis. However, fluctuations in unemployment appear to be more strongly influenced by aggregate rather than sectoral shocks. Significant variation exists across demographic groups in the responsiveness of unemployment to aggregate fluctuations and sectoral shifts. The adverse impact of sectoral shifts is greater for males and members of the nonwhite labor force. (JEL E24)

Introduction

Most empirical models of the aggregate labor market have assessed the hypothesis that negative shocks to aggregate demand and aggregate supply are responsible for cyclical increases in the unemployment rate. In contrast, the sectoral shifts hypothesis maintains that periods of higher unemployment result from above-average rates of change in the pattern of labor demands across industrial sectors of the economy. Underlying causes of these shifts include changes in production technology and input prices, along with the development of new products or competing sources of supply for existing products. Given their uneven occurrence, these shocks result in levels of frictional and structural unemployment which fluctuate over time and account for the cyclical behavior of the unemployment rate. [1] To the extent that sectoral shifts affect aggregate unemployment, macroeconomic forecasts which are based only upon aggregate shocks will be inaccurate, and countercyclical fiscal and monetary policies will be ineffective or e ven counterproductive if they impede an efficient sectoral reallocation of resources. [2]

Many empirical tests of the sectoral shifts hypothesis for the U.S. economy involve extensions of Lilien's [1982] analysis for 1948 to 1980, in which the standard deviation of annual employment growth across industry sectors was positively related to the unemployment rate. Shin [1997] and Brainard and Cutler [1993] maintained that sectoral shifts in returns to physical capital better reflect the changes in returns to human capital, which induce reallocations of employment and raise the unemployment rate. Using accounting measures of returns on assets, Shin found that the variance of interindustry returns purged of aggregate fluctuations had a significant positive impact upon unemployment, especially after 1972. Brainard and Cutler used the variance across industries of excess stock market returns from 1948.1 to 1991.2 to get a similar result as did Loungani et al. [1990] whose estimates indicated that an increased pace of sectoral shifts raised the natural rate of unemployment from 1968 to 1980.

This paper tests a measure of sectoral shifts which is grounded in the process of creative destruction described by Caballero and Hammour [1996]. Technical progress embodied in new capital and the introduction of new products makes older capital and existing capital-labor matches obsolete. The returns to capital measures of sectoral shifts previously used are based upon Black's [1987] premise that sectoral divergences in stock market returns motivate business restructurings and sectoral reallocations of physical capital and therefore are responsible for unemployment in a market economy.

This present study does not measure interindustry differences in financial returns. The chief hypothesis of this study is that periods with greater sectoral shifts in the pace of physical capital investment should have higher unemployment as inefficient production arrangements are eliminated and markets for obsolete products are replaced by demands for newer goods and services. When this occurs, workers must identify and move to industries that are gaining new capital and generating new employment opportunities. …

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