Seasonal Adjustment and the Business Cycle in Unemployment

Several recent studies show that seasonal variation and cyclical variation in unemployment are correlated. A common finding is that seasonality tends to differ across the business cycle stages of recessions and expansions. Since seasonal adjustment methods assume that the two sources of variation can somehow be separated, the present study examines the impact of seasonal adjustment on the analysis of cyclical patterns. Seasonally adjusted quarterly unemployment data for five G-7 countries are modeled by a Smooth Transition Autoregression (STAR), whereas the corresponding unadjusted data are modeled by a so-called Seasonal STAR (SEASTAR). A comparison of the implied estimated peaks and troughs shows that there is substantial agreement on the business cycle chronologies, albeit that for seasonally adjusted data, recessionary periods tend to last longer.