STOCK-MARKET DATA, VACANCIES AND SECTORAL DISPERSION

What causes cyclical unemployment; sectoral shifts or aggregate demand shocks? Using a new index based on stock market prices, Loungani, Rus h and Tave (1990) contend that sectoral shifts are the primary cause. Loungani, rush and Tave's findings are suspect since they performed on ly half the necessary tests. Missing is the important test, described by Abraham and Katz (1986), of checking the index against job vacancy rates. The result of this test, a negative correlation between the sto ck market dispersion index and job vacancy rates, reverses Loungani, R ush and Tave's conclusions by indicating that cyclical unemployment is better explained by aggregate demand shocks.