Sectoral shifts or aggregate shocks? A new test of sectoral shifts hypothesis

The sectoral shift hypothesis asserts that sectoral shifts in labor demand can generate a significant unemployment even if the aggregate demand stays the same. Past studies tested the hypothesis using the dispersion of sectoral shocks as a proxy for the size of sectoral shifts and reported contradicting results which are sensitive to the model specification. This paper shows that the dispersion of sectoral shocks alone is insufficient to capture the aggregate layoffs caused by the sectoral shocks and that the shape of the distribution (skewness) of sectoral shocks plays a significant role. The sectoral shift hypothesis is tested as a joint test of the significance of dispersion and skewness. The new test strongly supports the hypothesis, and it is robust to model specifications. Sectoral shifts are also found to be a significant source of cyclical variation in the aggregate unemployment rate.