Do oil price shocks drive unemployment? Evidence from Russia and Canada

ABSTRACT

This paper investigates the dynamic relationships between the crude oil price (COP) and the unemployment rate (UR) in Russia and Canada with a bootstrap subsample rolling-window causality test. This approach relaxes linear assumptions, fully considers structural breaks, and captures time-varying causalities between variables;thus, it performs better than traditional long-run causality tests. The empirical results indicate that there are dynamic causal links between the COP and the UR in certain subsample intervals, which does not fully support Carruth's model. Furthermore, the causality between the COP and the UR in Russia can be described based on Western sanctions, China-Russia energy cooperation and the COVID-19 pandemic. In contrast, a decrease in major oil companies' production and the development of U.S. shale oil are employed to explain the fluctuating relationship between the COP and the UR in Canada. Our study identifies potential heterogeneous reasons for the dynamic causalities of major exporting countries, and it reveals novel influencing mechanisms between these two variables. Thus, some policies are suggested to alleviate shocks from oil prices, including oil risk management and oil cooperation for Russia and oil export structural adjustments and monitoring mechanism establishment for Canada.