Relationship between oil prices, interest rate, and unemployment: Evidence from an emerging market

While the interrelation between oil price changes, economic activity and employment is an important issue that has been studied mainly for developed countries, little attention has been devoted to inquiries on fluctuations in the price of crude oil and its impact on employment for small open economies. Adopting an efficiency wage model for equilibrium employment that does not require any assumptions regarding labor supply, this paper contributes to the literature by investigating the causality between unemployment and two input prices, namely energy (crude oil) and capital (real interest rate) in an emerging market, Turkey for the period 2005:01-2009:08. Applying a relatively new technique, the Toda-Yamamoto procedure, we find that the real price of oil and interest rate improve the forecasts of unemployment in the long run. This finding supports the hypothesis that labor is a substitute factor of production for capital and energy. (C) 2010 Elsevier B.V. All rights reserved.