The time-varying causal relationship between oil price and unemployment: Evidence from the U.S. and China (EGY 118745)

Abstract

This study detects the relationship between the crude oil price (COP) and unemployment rate (UR) to explore whether the efficiency-wage model is consistent for the United States (U.S.) and China. It is unstable to use full-sample data in the long-run nexus with the consideration of structural changes, implying that causality is unreliable. Instead, the dynamic causal relationship is examined by a time-varying rolling-window method. In certain sub-periods, the existence of time-varying positive bidirectional causality between the COP and UR is illustrated by the empirical findings, supporting the efficiency-wage model indicating that these two variables can interact through supply, demand and inflation channels. For the U.S., deviations between the COP and UR can be explained by geopolitical events, monetary policy, financial crises and the shale oil revolution. In addition, the end of double-digit economic growth, financial crises and high oil demand lead to fluctuations in China for certain sub-periods. Hence, for the government, these empirical findings have significant implications for identifying factors that bring about the causal link between the COP and UR and moreover lead to policy suggestions for U.S. and China.