Uncertainty and Unemployment: The Effects of Aggregate and Sectoral Channels

We study the role of uncertainty shocks in explaining unemployment dynamics, separatingout the role of aggregate and sectoral channels. Using S&P500 data from the first quarter of1957 to third quarter of 2014, we construct separate indices to measure aggregate andsectoral uncertainty and compare their effects on the unemployment rate in a standardmacroeconomic vector autoregressive (VAR) model. We find that aggregate uncertaintyleads to an immediate increase in unemployment, with the impact dissipating within a year.In contrast, sectoral uncertainty has a long-lived impact on unemployment, with the peakimpact occurring after two years. The results are consistent with a view that the impact ofaggregate uncertainty occurs through a "wait-and-see" mechanism while increased sectoraluncertainty raises unemployment by requiring greater reallocation across sectors.