Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey

This paper investigates how macroeconomic policy shocks in Turkey affect the total unemployment and provides evidence on the differential responses of the unemployment by sectors of economic activity. Our paper extends the previous work in two respects. First, we consider not only the response of total unemployment but also the response of unemployment by sectors of economic activity. Second, we consider not only the effect of monetary policy shocks, but also the effects of several other macroeconomic shocks. The Turkish quarterly data used covers the period 1988:01 to 2004:04. A VAR model with a recursive order is employed to estimate the effects of shocks in real GDP, price, exchange rate, interbank interest rate, money supply and own sectoral unemployment on unemployment in various sectors of economic activity. The results indicate that a positive income shock is followed by a decrease in unemployment in all economic activity groups during the initial periods except for unemployment in the Electricity sector and the Community Services sector. A positive money shock decreases unemployment in Mining, Manufacturing, Construction, Wholesale- Retail Trade, Transportation and Finance-Insurance sectors. Opposite results are obtained with interbank interest rate shocks. Even when they are not statistically significant, positive interbank interest rate shocks increase unemployment in all economic activities at the initial levels but drive down unemployment in the Agriculture and Community Services sectors at the initial level. Moreover, a positive price shock increases unemployment in all economic sectors in the long run except for Mining and Community Services. Thus, unemployment in different sectors of economic activity responds differently to various macroeconomic policy shocks.