Sectoral shifts, stock market dispersion and unemployment in Canada

Considerable attention has been given in the last ten years to estimation of the importance of sectoral shifts in explaining short-term fluctuations in unemployment. Recent studies have used US stock prices data to develop indexes of sectoral shocks less affected by cyclical influence than Lilien's employment dispersion index. Two indexes of sectoral shifts for Canada based on the sectoral dispersion of stock prices growth rates are calculated. These indexes are then used in unemployment equations incorporating variables measuring aggregate demand shocks and structural changes in order to assess the importance of sectoral and cyclical shocks in the determination of the Canadian unemployment rate. The estimation leads to the conclusion that the major recessions of 1981-82 and 1990-91 have been caused by aggregate demand shocks. However, both types of shocks contributed to the 1974-75 recession while the mild recession of 1980 was accompanied by an important sectoral shock. Estimations also show that the most important sectoral shock was in 1986, following the drop in energy prices, but a strong aggregate demand prevented any change in the unemployment rate at this time. The model also detects an important structural rise in the unemployment rate during the seventies. On the whole, the results show that, although sectoral shifts have the potential to induce short-term unemployment fluctuations, actual changes in the Canadian unemployment rate were mainly the consequences of monetary conditions and foreign demand for Canadian goods and services.