Monetary Policy and Unemployment: A Disaggregated Analysis
Williams, Roger C., International Advances in Economic Research
This paper disaggregates unemployment into broadly defined sectors and occupations. It estimates the impact that a change in the Federal Funds rate (FFR) has on the magnitude and time path of unemployment in each of these sectors and occupations. It finds that there is a substantial differential impact. Specifically, the paper shows that an increase in the nominal Federal Funds rate affects unemployment much more severely in two sectors and in two broad occupational groupings than it does in the others. (JEL E24, E52)
The variables used in the empirical literature on the topic of how monetary policy affects the economy are often highly aggregated. Typically, among others, these variables include GDP, inflation, and unemployment. Less frequently, the literature addresses this topic using more disaggregated, sector level variables. As a result, it is a challenge to find estimates of the differential impact that a change in a policy variable, such as the Federal Funds rate, has on the magnitude and time path of unemployment in diverse sectors from manufacturing to services, and in occupations from laborer to manager. This deficit in the literature is problematic because there is evidence that unemployment often falls unevenly across sectors and occupations. For instance, according to a recent report on the 2001 recession by the Bureau of Labor Statistics (BLS) , after reaching a 30 year low of 3.8 percent in April 2000, unemployment jumped to 6.1 percent by May 2003. After peaking in February 2001, the private sector lost 3.1 million jobs by May 2003. This represented nine million unemployed people. The bulk of these losses occurred in the manufacturing sector, which lost 2.6 million jobs over the same period. On the other hand, the service sector gained more than one-half million jobs during this time. Obviously, models that only use aggregate unemployment cannot adequately address this disparity.
To the extent that monetary policy contributes to episodes of higher unemployment, updated models that estimate its disparate impacts should be readily available. The purpose of this paper is to contribute to filling this gap.
The paper is organized as follows. In the next section, a brief literature review is offered. The following section contains a discussion of some of the relevant theory. Then, the empirical results are presented. The last section consists of a summary and conclusions.
Although much of the literature on the economic effects of monetary shocks uses highly aggregated variables, there are some researchers who have disaggregated the standard macroeconomic variables by sector. These include, Ahmed , Kretzmer , Norrbin and Schlagenhauf , Kandil , and Loo and Lastrapes . However, rather than focus on sector unemployment, these researchers mostly focused upon the response of sector output and/or wages and prices to monetary shocks. On the unemployment front, Lilien  argued that a significant fraction of cyclical sectoral unemployment in the post war era can be explained by the slow adjustment of labor to exogenous shifts of sectoral labor demand--rather than the standard explanation of a shift in aggregate demand. In a rebuttal, Abraham and Katz  argued that based on data analysis, the two theories were observationally equivalent. In an attempt at a resolution between these two views, Loungani and Trehan  used disaggregated sectoral shifts (as measured by a stock market index) and the FFR. However, they used these variables to estimate aggregate unemployment, not sector unemployment. In another attempt at resolution, Blackley  concluded that both theories can coexist, but his study did not explicitly include monetary or interest rate shocks.
With respect to methodology, several researchers, including Blinder and Bernanke , Leeper , and Stock and Watson , have used various types of vector autoregressions (VARs) (reduced form, structural, recursive) to estimate the impact of the FFR on aggregate unemployment. …