Asymmetric effects of the WTI crude oil price on unemployment rates: a comparative study of Canadian provinces and the United States

• Author: Young Cheol Jung,Anupam Das
• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/opec.12126
• Date: 01 June 2018

Asymmetric effects of the WTI crude oil

price on unemployment rates: a comparative

study of Canadian provinces and the United

States

Young Cheol Jung and Anupam Das

Department of Economics, Justice, and Policy Studies, Mount Royal University, 4825 Mount Royal Gate

SW, Calgary, AB, Canada T3E 6K6. Email: yjung@mtroyal.ca; adas@mtroyal.ca

Abstract

Since 2014, Canada has been experiencing a higher unemployment rate due to a slump of the crude

oil price. Using a monthly data set of the West Texas Intermediate (WTI) crude oil spot price and

unemployment rates of Canadian provinces and the United States from January 1976 to October

2016, we examine the asymmetric effects of oil price on unemployment rates. Specifically, we split

the sample into the pre-technological boom (January 1976 to March 1995) and post-technological

boom periods (April 1995 to October 2016) and analyse whether the asymmetric effects are

discernible in these two periods. This is done by applying the ordinary least squares regressions

and Granger causality tests. Our findings confirm the asymmetric effects for the full sample in the

United States. In Canada, the negative and asymmetric relationship is conspicuous particularly in

the post-tech period, and this relationship is more prominent in three oil-producing Canadian

provinces namely Alberta, Saskatchewan and Newfoundland & Labrador. It is noticeable that both

in Canada and in the three provinces, the falling oil price affects unemployment adversely only in

the post-tech period. Granger causality tests support the short-run causal relationships between

changes in oil price and unemployment rate in the post-tech period.

1. Introduction

Standard undergraduate macroeconomics textbooks mostly treat higher oil price as a

negative supply shock in the aggregate demand–aggregate supply model. The negative

supply shock results in lowering employment and the gross domestic product (GDP) by

increasing the cost of production. Since the global oil shock of the early 1970s, a vast

amount of research has examined the link between oil price fluctuations and economic

activities in both developed and developing countries. The literature mostly discusses the

effect of oil price on GDP; however, very few papers have analysed other macroeconomic

JEL classification: C32, E37, Q43.

©2018 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

123

indicators such as unemployment. Earlier studies show a significant detrimental effect of a

negative supply shock on economic performance (see, e.g., Hamilton, 1983). Recent

studies, however, find that the effect of an oil price shock depends on a country’s

composition of the trade basket. For example, Peersman and Van Robays (2012) argue

that the economic activity in net energy-exporting countries changes insignificantly with

the rise in oil price, while the net energy-importing countries are affected negatively from

such a shock. Although the negative supply shock is usually associated with a fall in the

GDP and employment, results from the existing literature do not necessarily conform to

this relationship. Kilian (2008), for example, does not find evidence that the 1973–1974 or

the 2002–2003 oil shocks had any significant impact on real growth in G7 countries.

1

After the first oil shock in the 1970s, Canadian GDP growth fell from an impressive

7 per cent in 1973 to 1.8 per cent in 1975, mainly because during this crisis period,

Canada was not a net exporter of energy.

2

However, from the early 1980s, Canadian real

GDP became increasingly sensitive to any changes in the price of energy commodities

due to a considerable increase in net trade surplus of energy-related products (Stuber,

2001). There was a particularly high growth of the oil extraction industry in the oil-

producing provinces including Saskatchewan (SK), Alberta (AB) and Newfoundland &

Labrador (NL). In SK, the crude oil production grew at the annual average rate of 11.3

per cent from 1993 to 1997. This rate of growth was much higher than the annual

average growth of 3.3 per cent from 1987 to 2012. Until 1997, there was no crude oil

production in NL. Remarkably, production of oil in this province has since grown at the

annual rate of 22 per cent. AB, which produces and exports the highest amount of crude

oil, experienced a falling share of oil production until the mid-2000s, thanks to the

growth of the oil industry in SK and NL. AB eventually regained its share of oil

production after 2005.

3

Consequently, the employment share of the oil and gas

extraction industry

4

in Canada increased from 0.25 per cent in 1997 to 0.42 per cent in

2016. While the oil and gas extraction industry employs about 0.4 per cent of the total

labour force in Canada, its contribution to Canadian GDP and export is much greater. In

2016, the share of the oil and gas extraction industry to Canadian GDP was

approximately 6.33 per cent. In the same year, the export earnings of this industry were

almost 7 per cent of Canada’s total export earnings.

5

Conversely, the oil and gas extraction industry has a much smaller contribution to

the US economy. This industry employed about 0.12 per cent of the total labour force in

the United States in 2016 and its contribution to GDP was merely 0.87 per cent. It is

because the United States has remained a net importer of energy that the difference

between the two nations’employment share exists. The United States reliance on the

imported energy reached the maximum level in 2005 and then declined significantly by

2014.

6

Figure 1 presen ts the trend of oil and gas extraction share in the GDP of Canada,

Canadian oil-producing provinces and the United States since 1997. Among Canadian

OPEC Energy Review June 2018 ©2018 Organization of the Petroleum Exporting Countries

124 Young Cheol Jung and Anupam Das