Determinants of unemployment in Turkey for 1988-2007 period: Sectoral versus aggregate shocks

According to the sectoral shifts hypothesis of Lillien (1982), fluctuations in labor demand across sectors are responsible for a substantial fraction of the variation in unemployment. The main purpose of this paper is to test the Lillien hypothesis that sectoral shifts in employment are also responsible for fluctuations in aggregate unemployment for the Turkish economy. The long run relationship between sectoral shifts, as measured by Lillien index, and unemployment along with the other determinants of unemployment will be examined for Turkey by using Vector Error Correction Model over the period 1988-2007. The main result of the cointegration analysis is that one of the long run determinants of unemployment in Turkey is the sectoral employment demand shifts. Therefore, sectoral employment shifts may explain some part of the increase in unemployment. Our analysis also shows that there is cyclical component of unemployment in the long-run for the Turkish economy.