Regional Labor Fluctuations: Oil Shocks, Military Spending, and Other Driving Forces

Steven Davis, Prakash Lougani and Ramamohan Mahidhara
Authors registered in the RePEc Author Service: Prakash Loungani

JCPR Working Papers from Northwestern University/University of Chicago Joint Center for Poverty Research

Abstract: We qualify the contribution of various driving forces to state-level movements in unemployment rates and employment growth from 1956 to 1992. Our story of regional fluctuations in the U.S. economy has a large cast of players -- including government contract awards and the basing of military personnel -- but oil shocks have been the leading actor since 1973.

State-level unemployment responses to regional shocks persist for several years. Net migration of people and workers between states is the dominant equilibrating mechanism that brings regional unemployment rates back into alignment. Our preferred estimates for the cost of local job creation, which account for spillover effects across state boundaries, imply that 34-56 thousand 1982 dollars in contract awards buys one (one-half) job-year using the BLS (CPS) employment measure.

Spatial dispersion in the regional cycle component of state-level unemployment rates is large, and it varies counter cyclically relative to the national business cycle. Our regression models explain much of this time variation in the period since 1973, primarily through the estimated effects of oil price changes. Adverse regional shocks -- whether involving government contract awards, military basing decisions, or oil price changes -- have proportional greater effects on state-level unemployment rates than favorable shocks. Thus, shocks to the spatial structure of demand do not "average out" in terms of short-run aggregate effects.

Date: 1997-05-01
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Working Paper: Regional labor fluctuations: oil shocks, military spending, and other driving forces (1997)
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