Sectoral Shifts and Unemployment in Interwar Britain

This paper measures the importance of sectoral shifts, as against aggregate shocks and changes in search intensity, in explaining the persistent high unemployment that prevailed in interwar Britain. It develops a new measure of sectoral shifts that captures the arrival of information about reallocation shocks by using the cross-section variation in sectoral stock market excess returns over time. The cross-section variation series accounts for roughly one-quarter of the average level of aggregate unemployment during the interwar period, even after controlling for a variety of shocks to aggregate demand, and for roughly one-half of the variation in unemployment, suggesting an important role for sectoral shifts.