Economic policy uncertainty and labor market volatility: ARDL analysis of short and long-run effects on U.S. unemployment

Abstract

This paper explores the nexus between economic policy uncertainty (EPU) and unemployment in the United States from 1990 to 2022, recognizing the necessity of grasping how unpredictable policy shifts affect labor market stability. The purpose is to evaluate how fluctuations in EPU impact U.S. unemployment rates in the short and long term. Employing time series analysis and an Autoregressive Distributed Lag (ARDL) cointegration approach, this research incorporates key economic indicators such as GDP growth, inflation, and population growth, alongside the EPU index to capture the different dynamic interactions over time. Our empirical results indicate a cointegration link between the variables based on the ARDL bounds tests. The results reveal that economic policy uncertainty has a delayed and nonlinear impact on unemployment in the short term. However, in the long run, the results elucidate that a 1% increase in economic policy uncertainty results in a 0.019% growth in the unemployment rate. Additionally, inflation and population positively affect unemployment volatility in both the short and long run. Conversely, economic growth considerably stabilizes the labor market by reducing short and long-run unemployment fluctuations. The study underscores the need for stable, predictable policies to reduce unemployment volatility. These results suggest that policymakers should consider the broader implications of economic uncertainty on labor market dynamics.