Oil and Unemployment in Germany

The recent years have been marked by massive price movements in resource markets. Particularly record high prices for oil have been reached. Although until late 2008, oil prices have decreased from nearly 150 to about 40 dollar within a few weeks, long term scenarios suggest that the era of cheap oil is over. Against this background, this paper addresses possible oil price impacts on unemployment for Germany. Firstly, we survey theoretical and empirical literature on the oil-unemployment relationship and relate them to the German case. Secondly, we illustrate this issue within the framework of a vector autoregression (VAR) approach for Germany. In order to adequately address the issue of oil price effects on unemployment in Germany, we conduct a detailed analysis with two particular features: We, firstly, tackle the question about the nature of oil price effects by making use of three different constructions of oil price movements, namely a simple oil price variable according to Hamilton (1983), an oil price increase according to Mork (1989) in order to address possible asymmetric oil price effects, and the net oil price increase based on Hamilton (1996). This variable compares current oil prices with the maximum value observed during the preceding year and should therefore be a good indicator for an actual oil shock that is not representing immediate oil price corrections to earlier declines. Secondly, against the claim of a changing relationship between oil prices and the macroeconomy since the 1980s, we base our analysis both on a sample period 1973 to 2008 and on a sample period for unified Germany (1990 to 2008). Using monthly data, we show that the oil price – in all three specifications – increase unemployment on the German labor market. For a restricted sample period for postunification Germany, we oppose claims that the oil to macroeconomy relationship has weakened since the 1980s. These results show that, although the German economy has become much more energy-efficient in recent years, its macroeconomy and particularly labor market situation is still very much dependent on the situation in the oil market. This situation, however, seems to be better indicated by (net) oil price increases than by a linear oil price variable. This may be due to the costly resource reallocation in situations of actual oil price shocks (Jones et al., 2004). The result suggests that indeed, as Hamilton (1996) argues, it is rather general concerns about the price and availability of energy instead of fully rational reasoning that result in negative consequences of an oil price increase.

Löschel, Andreas and Ulrich Oberndorfer (2008), Oil and Unemployment in Germany, ZEW Discussion Paper No. 08-136, Mannheim.