Board of Governors of the Federal Reserve System

August 2000

The Declining Volatility of U.S. Employment: Was Arthur Burns Right?

M. V. Cacdac Warnock and Francis E. Warnock

Abstract:

This paper attempts to add to the understanding of changes in the magnitude of business cycle fluctuations by examining disaggregated employment data. Specifically, we use a stochastic variance approach on monthly employment data for the 1946-1996 period to highlight two stylized facts of aggregate U.S. employment - greater volatility in recessions than expansions and reduced volatility since the early 1980s. These patterns are not, however, apparent in each sector of the economy. Asymmetric volatility is only evident in manufacturing and trade; other sectors, such as construction or the narrowly defined services sector, are just as likely to exhibit high volatility in expansions. A general reduction in volatility is evident only in goods-producing sectors; some industries in the broad service-producing sector have become more volatile over time. Our results highlight the close relationship between aggregate and manufacturing volatility, and suggest that to understand why the U.S. business cycle has become more muted, researchers should strive to understand the forces at work that are reducing volatility in the manufacturing sector.

Keywords: Employment, volatility, variability, business cycle

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