Inter- and Intra-Sectoral Shocks : Effects on the Unemployment Rate

Inter-sectoral shocks require resource reallocation across sectors, while intra-sectoral shocks require resource reallocation within sectors. A crucial difference between these shocks is that the former requires much higher adjustment costs than the latter. Using accounting data to calculate returns on capital in manufacturing industries, we generate proxies for these shocks. We find that the magnitude of intra-sectoral shocks is much greater than that of inter-sectoral shocks, but inter-sectoral shocks explain the aggregate unemployment rate better than intra-sectoral shocks. We also find that inter-sectoral shocks are more closely related to the unemployment rate in the latter part of the sample considered