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B o ao G o v e ro t F e dR e sS y
I n t e r n a tF i n aD i s c uP a
N u m5
M a r1 9
R E G I O N A L L A B O R F L UO IS H O C KM I L I TS P E N DA O TD R IF O
S t e vJ D a v iP r a kL o u n ga R a m aM a h
N O T EI n t e r n a t i oF i n a nD i s c u sP a pa p r e l im a t ec i rt s td i s c u s s ia nc r i t i cc o m m eR e f e r ei p u b l i ct I n t e rF iD i sP( o t h et h aa a c k n o w l e d gt ht hw r ih ah a c ct u n p um a ts hb c lw i tt ha u t ho a u t h oR e c eI F Da ra v a i lo t W a w w w . b ou
R E G I OL A BF L U C T UO IS H O C KM I L I TS P E N DA O TD R IF O
S t e vJ D a v iP r a kL o u n ga R a m aM a h
A b s t
W q u a n tt hc o n t r i bo v a rd r if ot s t am oiu n e m p l o y m er a ta ne m p l o y mg r of r1 9t 1 9O s to r e gf l ui tU . Se c o n oh aa l a rc ao p l a y- i n c l ug o v e rc o na wa t b ao m ip e r s o n n- b uo ip r is h o ch ab et hl e aa cs i1 9B et m aaa b r u p t n eo o ip r im o v e m e nt he x p l a nf t hp r o nr e ge fh t e se l e m e n t( ir e g i od i f fi i n d u sm i( ii n d u sd i fi s e n st m o vi t r ep r i co o i la n( i it hr e a l l o c ao p r o d u cf a ca c ri n d ua r ei c oa tc o n s u m i n
O us t up r o v ie s t i mo t hc oo c r er e gj a r er eu n e m p l o y m et h r o ut ha w a r do m i l ic o n t rB ao t B m eo fe m po ub a s e l is p e c i f i c a ti m pt hc r e a to nl oj o b -r e qn a tg o vp uf r ol o c af i r mi t ha m o uo $ 5 6 ,t $ 9 1 ,( m e ai 1 9 8 2 dT e s tc o jc r e a t ii m o rt h at w ia l a rf ot hb r o tC m e a sE c o ns p e ct c od e m a ns p i l l o v ea c r os t ab o u n d ad e l ij oc r e ac oe s t ir o4 0s m
W f i na s y m m eu n e m p l or e s pt p o sa n e gr esN e g a t is h o c- w h e t hi n v o l vi n c r ei o p r io s c al mo c o na wa m ib a s e- h a va g r e a ti m p at he q u a l -p o s is h oT he v ii mt s ht ts p a t i as t r u c t uo d e m a( e . ga r e a l l o co g o v e rc o na w ac as h oi nia g g r e g au n e m p l o y m e
S t a t e - l eu n e m p l o yr e s p ot r e g is hp ef s ey Nm i g r a t io p e o pa nw o r k eb e t ws t ai t hd o m ie q u i lm e ct b rr eu n e m p l o y m er a tb a ci na l i g n m
K e y w o r dr e g i o nc y c l eo is h o cd e f ee x p e n d im i lb au n e m
*L o u n g a nI n t e r n a t i oF i n a nD i v i sF e d eR e sB o aD aU n i vo C ha NM a h i d h a rA m oC o r p o r a tW a c k n o wv eu s ec o mf V aR (d i s c u s s aa a N B Ec o n f e r e nT iB a r tD aB l a n c hR aE bC E MH o o k e rJ o y cZ i c k l ea ns e m ip a r t i c ia n u m ev e ni n c la O c1 c oo “ I n t e r n a t i oE n e rS e c u r iE c o n oV u l n e r at O P rS h o’ o rb t D eo E n e r ga nt hD e p a r t mo S t a tW t h aO l iB l a na L aK f s t ad oe m p l o y m e nM e r r iW e g nf oD e p a r to D e f ep rc o na wa p e rH eBf oN A Sp r i mc o n t r aa w a rW a yV r of s t a t ec i vu n e mr aa PK e n n e df oi n d u s ts t or e t ud a tD a vg r a t ea c k n or e ss uf t UN a t i o nS c i e nF o u n d a ta nt hU .D e p a ro E n eT v ii t p a s tr e s p o n s i b i lo t ha u t h oa ns h o un ob i n t e r pa r e f lt v io t B o G oo t hF e d e rR e s e rS y s to o a no t hp e ra s s o cw it F eR eS y
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1 9p eH f t o a vr e ss h f b a
m v og ro t p eB a B p e o t i
o a o p i no g s p r
1
m a ni nt o p s i l t e c oh
W c o ns ek i nt a l t e xe s h
f ac o s hl f g d i t w o a o p i A
s e x p ew c p rm ( 3 t c t f e a
m v e( 3 t c at l a
F e i nw c ao n at ir eo t f
G = / + 6 C - t 3i 9a101LRt–1+-vat, i = ~,3 ..., ~o, (
w O i t g rr o t r ep o c p a C i t
c hi a p ad il o U d c a T c (
a O s t r eo n ae mg i i z t c o
a l ao p s h
W e st r eu a U d f 1 t 1 E o
t O a o c o ee xt e xp rM e i
s i gi r et a i ni o p b t e c a n
t f o i n da i m c s id f z T e
i mo o p ro e mg i m l i c om
a T t i t o f l i nW m at i
l a c oS 2 ( Pa C P rS 3 ( C a
G P ra S 3 ( N oM at c t “ h
f ac oe fT t i nd n a m t t s v i
t O m e( b d es ha w d f f cI Go t d ii B ( c 5 w c d ( ‘
c oe x pa . t c o nc a p . t l
a wp . t t w ia C e t c i e s
m e
I
o p r i m am e t aa nm o tv e h i ci t w ia l aa f t “ om a n u
c a t e g o r
W i n t e r at he s t i m an a t i or e s p oo i n de m pt o s
w i ts t a t e - l em e a s uo i n d u se m p l os h a( d eb S a f
1OIL~t = – ~(i92001LRt + 02101LRt_1)S28t. (
2
I i i mt n t w c ot t s f S b l i
t b ed eC y T p rr p c c i
e m ps h
c o m
W h y p
w i n cm s ls i s i
t O c op ow s tu m
m eI o w oa o p i nc a s u nr i s
w h ie ms d et i nm a a b a i
c ri o p rO a pa f n or t o p c
a t r eo s ec hi s ti p o
3 I nm a n or et n b c
T d rf oc ot f h t a dt t m m
r er ei d ee vs a w a p d b O t a
e xt t U
b s d i s
b uc yu
b uc T t e t n b c a d
w e t c a n os tr t n
t m ed ea H m v a o
p s ha u nt e xt l o i md f b n
c yw n os te fH f oN a T (
a B a( 1w c oa a de xv t c d
a s ti t s et n ab c d b o “
1
I
d i sl S p ef e s w c oa “ pn c e
o e m pb i n tt n ae mg r r v i t
r e g( w s tm eo i ne ms
1M = ~ S (
2
T s t a tn ac v ap u t e o t m s s
a c hi t s to m op t w d n m d W e
M t c on ew s u n
3 A l ls hw s
P rr ei nt s t t i s o d p a
r i a gu n em ob o f i t p o r
c aw ot j I L( 1D ( D a H ( T
s l i mt s t t s to d w s p a r i s
u n ef l uL m et i o s ‘ Ld
b c o na m eo t d io e mg a i L
g R a T ( a B ra C ( s t t d o
s r ea ci nh m e xp f a u .
W i mt i a t s l b i ni s r a t
I Ts th a l h ii r ee c o n o ld f T ( ‘
F oa N a( 11 T s ts ut s r ew b b t a m l t
r ep es ht i nf oS r d m a o
c c ep rs ub e m pd im b s
r er em i ma s et n a p s t t
d ea l lo l a o f o p r
1
n a t i o nl e v ew i ts t ae m p l o ys h at o b ta s tm ad i si f
e a cs t a tL Rzt d t s r f i i a t t a l R d
t a gs r e1 W ~ ot w d iof industry-level excess
r ew w eg b s te ms
([
7
11
STDISP~t= ~Si~t(Rat– Rt)2 .2=1
W e xSTDISP~t t c p ow s tu n
4 T e fo t d rf o u n
B r e g( 2
P A i T 2 r et e ss o c oo c a l
v ao e i n dv ai o b au nr eT i
p ev aa s b t r es d es t t s g
t e sc ue o a o s td ei i c a l
v aA r e gi ns a y f e s t t c s
p ri n fa t f d t r c c o s
u n ef l uP B r t s tf t j n h
t c ua l av o a i nv h n e p
1 9 1 na a gr ew ec oa v al c ‘
f i re qv au C d f s i g m m
i c o nt r aa p u tF s a tz E xf C a ~ i t c iu nr el 1 c
b t rt
r et f
m a s i
t w il o e xp T l l f C p
t a e x po l c a s B ( W
a df t l i c at c o j c i s 5
20
I
C ot r ef t c iu nr r eF a f d
f ot c o es h t a ns a t n h o n e i
r ea c o ns i gl T e sr m f a u
s td es v c oa t d f O p s h
l e fc oi s t t c or o t u ns c
b t l kv aA s i t t t s o c oo c a l
v ao O i 0 p ep T c oe o c a l
v ao O a t d ev ai a p u nr t a u
s td ec hi O o n o p ep T o i
v ap s mr a d rf b r u nf
R ef t i nu nr a b s b t e
e fo t d rf a m as O c t m a s
d eo t i nu n er a a m s T m d
p et t m iv af w t c os a s a s
i n s iF -s th oi nt c a l v o C
a M a j os i g
E v at b r e( 3 a F 4 a 5
O e sr eh
T
w U i t u n er i s s a t = i a y e a i a s
e ft v eX c oa r e( il o t d v
~ i t e sc ov ea q i a r B o ( w c o
t t o e xt a h w t b r em e t r
c c oo u n ev aT f t f o t a l
2
a nt i mv a r i a t io c r o s s - sd i s p e ri t r e g ic yc o mT s
f oo t v ai t r ec c of i s F t
s o b rw r et r eo t e xf t c u r
o
W p r ed et r ec c oa a d f s a y
f e fi U = U – a – ~ L a d t u s d
o t r ec c oa t t
r 1 1at =
p( 1.,.~–T7J2 , (
5
w h e r~ T ,d e n o tt hu n w e i gm er e g ic yc o m pW r et o a t
“ ad i so t r e
T a st p e ro
c c o
t m i a cf t m a t
v ao a d et c o r“ pd i
r r~ 11P —o’t —
p 1’( - XJ?)2 , (S
w X e qt u nm o t e sr c c
C lt b eo u d eo t o bv i t d f a t
e sc o eW c oOIIQVersion O v ao t l
d ev aa a s “ dv u t m i g
p r eT f v eo a h e la s st o a o t m T
s ev eq ut m oc at e u nv i t
o m ed rf o
F i4 d it t p o o a a a T 3 r r i
T a cd ii t r ec c oo u nr f a
2
....
s td eo l t o p ep i 1 t a 2 p
p oi 1 I o w t d o s d ii l m t
v ac o no t U o bv o t d v i (
t p rd io t r ec c oc t a d
T 3 s t a d ii m ol o a a m v
o t t p rd iT s c ob t t s i .
T d yp rd ir f a s d o r .
p e rp oi s ew s cy a . p p i
a 1 I a v. p ep a c t 1 p p f
a cd i sB t m eo m ed f a f a o
o t a vc r ov ai t r c c o u
f l uF i4 s t t d p rd c m o t
t v a ra cd io t l h as A a d
p rd i sr s hi t a fo t m
1 9a 1
T s t ar ei t l p o 3
o p s 1
a t c o
t f d rf ot m oi W c oa f e b z
o t e sc o eo t o d f B t c i
c o vt c oo d yo d I s t t t T c
i nt a f d rf m a a pc ot e t
l a t v a ro a o p s a t b d f b
r eu n ef l ui t o ft b t a l o
d i sa i t v a
T a st m oa bt e w it v i t r
c c oo f uw p i a a m F e s s
2
w f c aa m eo a v oi t r c c
T[ x11
g = ( r,st — ~r,s)2 I
t=l
(lo)
a a m eo p rv o
T[ x11
~P =s xs@ – x.@2 . (11)
t=l
T v ao O f t 5 s a s i F 5 b t h o t w
p oo t b T d p oo t b r e[ – o t i a d
b p la t w b i no p ra a d b b t z
l i nu p rT p rv @ a g u t m
i n tg ep ro t l d ev aT f s t
p rv ao w i tv ol u w w a v W t i
a t et o v e( o o 5 s tt f d n s a d
p at t p re r
T 4 r es us tf o a a a a b i a l p
t f oo t c o no t i nd f O a o p
s he ma t s m i md f T a e i f
r eu n ef l ui h fs s a M I a
O T m iv am s c ot r u f
t i t “ as b l c oi s s F e o
i l f C o na W aw i nt p c a h
b a i ms oo u nf li t s o i l
Z la cv ao t l d ev aa u a a ~ a v c
f a le s t
24
f A lt D io C oa H W a N M h b
s ut l at a vs t t i ns o d j b t
r e ll v af @ ’ [
4.3
a
S p i( T5
T 5 r et r eo a r es pv f t c a
m ip ev aT f ac oo s a o e
w s e s pv ab t s td eo t c oo
m ee CONR i s i dt C
C hi t b o m ip eg t s e i a
t a i c ot d o we T c os o . a
t ie sa c t z i b r eT c oo n
o e fa t s pe fs ut m b d h i
b h il oe fo r ee c
I c ot s pe fo p c a a l a s
s i gI t c iu n er r et e c s o
CONR i t a l a
a f v at f i
s th a b ie
T c h a r
t c o rs f t o v C T
i nt ~ c m e xi s
t e p capitao we x
o r el m b i n c i
b lb i i w t r t f eo t p c d F s
a h e x po f b t b oo t p c s
z t r el l m aa l c a pb C r t
b U s tt a r e se xm i c t t i m t
a o wm e
25
I
S ee x pt yl s ob c a a t i c
e rv aa r ai t l o l B f i e i
t C a CONR v aa m eo e xb t m e
c oi p rm s mi t r ev s a
a m l it r ew t r t t s a t r c
o t t il i m l t a o a t r l T w s t
m e ae u nt r el s pe o c a b
q u at e xa i no m ee i a t f a o
R e go i n t eT 5 h it d o i r s
e fi e v at l e ce o c a
A s ye f( 6
S tr b uc m t i na r f o p s [
K a L o( 1p rt t r eo r a t p a n
o p s hi r os yI t c o m o s o t
w ec ho t hs ue i a a p f
S o r ed a d ib t “ aa “
c ht hw o s a a ga [ D ( L
( 1M ( 1a D a H a( 1I o s a t m
b et d ea a d io f i a i t a f i
t p ro r e af i t n u e a d i o p i
a n ee fo a go a e mT t e t o s
i na ga ct ha la w a a c p i
h l an e ft p d eW i nw a o t
s a i mi T 6 b a ln a p v o O t e
26
I
s e pi t u n er eS a c b m f m
e x ps w a a C C a I t h a e
T e vi T 6 s ut t o a sp b t t
s tt a l la so o a m is I t c u r
r e gt e se fo n ec i o a r c
a wa n et a l a t e o p c T a i e
m d rf m ip ec hT e f O p t a m
a s y m m e ti t hc i v i lu n e m p l or e g r ea a s ha s yi t i n
u n er r eT d ef s i c w t v
t t i mo o p o r a cw t a m o b “
a ‘ L ac h
W t e vi T 6 f t a sp rt h t r
s r ei P B r t m o t e i w T h o e
c o es o p oa n ev i r a c os l
e o f t m ip ev ai t c u nr a f
t o s v ai t i nu nr eT h o i
d i sl o p oa n ev i r f t c s v
i b r e ga f t m ip ev i t c u
r e g
5. T j d yo u n ee ma p a
5 A P V M w O S a C A
T i n vt j d yo r el m v w s a
V m t i nO C log e m( t c u
r (UN), a t l f p a rr ( E sw a t O
27
a nCON v at t V s c ob B a K ( W
i n cr es pe fo C i a m s o b I l o o
e ad i so e xw i da s tV b i t f
c ao ro t r e di n(OIL, CON, EMP, UN, PART).
R eOIL a C i t o rd n a t r
W e st V o p d f t 5 s o t 1 t 1 p
W i nt l o e v aa f s a y f e a i
c os c o ea s tF A a A i A A d a
c os o i mr ef uc ot t e V a t
c ao rs pa I t m t w r a t t r o
l m av at OIL a C i m
F i6 s t d yr et a u s d OIL s T
p e fo t B e mm i a d o 0 p a t y
n y l e ms l 0 p b i i l T p i
o u n ei a r o s lo 0 p ep o y a t i
U n er et i i nl i s y T e o p a
s a p e rT e fo a n eu s d s t C
s i F i7 a q u as b s i m T p r
i t B e mm ei a 0 p d t y a t i
T r es ut B k me o t r o m a t
“ da dm ei r et r s T i f
b e c a u st hs uo p a r t i c i p aa nu n e m p lr e s pi m s mt t
Q s Ea e iv aV m a u t ordering (0~-L, cON~ ~~x?
EMP, UN, PART, STDISP, MIL) y r s t t o d i t
t
28
. : , ,, .
employment response. This pattern is especially pronounced for the longer term response,
but even the impact effects are dominated by employment adjustments, suggesting a rapid
migration response.
To investigate the sensitivity of these conclusions to the employment measure, we
re-estimate the VAR using the CPS employment measure in place of the BLS measure.
Figures 8 and 9 display the BLS and CPS employment response functions implied by the
two VAR systems. According to Figure 8, the impact effect of an oil price increase on the
two employment measures is nearly idential, but the longer term responses differ greatly.
In particular, the longer term CPS employment response is about one-half larger than
its impact response and about one-half larger than the corresponding longer term BLS
employment response. Evidently, longer term migration responses are considerably larger
than the initial employment impact, and this additional effect involves employment losses
in sectors not covered by the BLS measure.
Figure 9 also illustrates important differences between the impulse response patterns
for the BLS and CPS employment measures, but of a quite different nature. The impact
effect on CPS employment is virtually zero, and the CPS response function lies everywhere
above the BLS response function. This result indicates that the negative BLS employment
response to a decline in military contracts is partly offset by employment increases in BLS
uncovered sectors. As a corollary, the implied migration responses to military expenditure
shocks are smaller than suggested by VAR models that focus on the BLS employment
measure.
In summary, Figures 6-9 support the following conclusions. First, most of the impact
effects of negative regional shocks show up as declines in the regional cycle component of
unemployment and participation rates. That is, the migration of jobs and workers does
not occur rapidly enough to immediately dissipate the local unemployment effects of local
29
shocks. Second, the longer term imprint of regional shocks largely involves changes in the
regional distribution of employment and the work force, rather than persistent differences
in the regional cycle component of unemployment and participation rates. The migration
of jobs and workers dissipates the
few years. Third, the longer term
by negative regional shocks greatly
local unemployment effects of local shocks within a
employment losses (and migration outflows) induced
exceed the initial employment losses. In other words,
regional shocks impart a certain momentum to regional employment growth that persists
for several years. Fourth, apparent responses of the BLS employment measure to oil and
military impulses partly reflect effects on the distribution of employment between BLS
covered and uncovered sectors.
5.2 Incorporating regional spillovers into the VAR model
Section 4 finds large spillover effects of military contract awards on
rates. Motivated by this finding, we introduce spillover effects into our VAR
explain how to calculate impulse response functions that account for them.
unemployment
framework and
We then apply
the expanded VAR model to calculate the cost of creating jobs and reducing unemployment.
The CONR values are linked to the CON values by a set of linear identities, so
we need not expand the dimension of the VAR to accommodate spillovers. Instead, we
simply introduce the current and two lags of CONR on the right side of each regression as
an exogenous forcing variable. The main issue is how to appropriately calculate impulse
response functions for military expenditlmx. In discussing this matter, it will be convenient
to alter notation slightly as indicated below.
Let POP(RIS’) and DEF’(RIs’) denote population and real contract awards, respec-
tively, in region R, less the corresponding value for state s’. Then, assuming that year-
to-year population changes are small, we can approximate CONR for state s’ at t as
30
follows:
(12)
DEFt(s) POPt(s)
POPt(s) POPt(RIS’) 1[
~ A DEFt(RIs’, s)1 [DEFt(s)APopt(s)
POP JRIS’) + PoPt(s) POPt(Rls’) 1
Hence, the impact of an impulse to CONt(s) on CONRt(s’) equals the coefficient
IPOPt(s)/POPt(Rls’ )]. (This coefficient is invariant to the size of the CON impulse
under the approximations
Taking the average of this
used in (12). ) Summing over s’ E R, s’ # s, delivers
~O~~(s) ~[1/POPt(Rls’)].s’#s
expression for the states in the region gives
(13)spILLt(R) = ; ~ F’OP,(S) ~[1/p@’t(Rk’)].
SER s’#s
Thus, to capture spillover effects in the VAR impulseresponseanalysis,weshockthe
CONTRterm by SPILL times the size of the CON impulse. To capture the combined
effects of own-state and spillover effects. we simultaneously introduce a unit CON shock
and a CONR shock of SPILL units.
According to (13), we have potentially different time-varying values of SPILLt(R) for
each region. However, simple algebra shows that equal-sized states within a region implies
SPILL = 1. We maintain this value for WILL in our cost-of-job calculations below.
31
I
5.3 Military spending and the cost of jobs
Recent studies by government agencies, congressional
organizations reach vastly different conclusions about the
coalitions and private research
regional and economywide im-
plications of the post-Cold War defense cutbacks. In her study based on county-level
data, Guthrie (1993) estimates that a $1 million decline in prime contract awards lowers
employment by 9 to 50 workers.24
We use our unemployment regression and VAR models to estimate the cost, in terms
of national government purchases from local firms, of creating local jobs and reducing local
unemployment. We express these costs in present value terms using annual discount rates
of 3, 5 and 10 percent.25 The resulting calculations deliver estimates of the present value
cost of creating one job-year and of reducing unemployment by one person-year.
Table 7 reports the results. When the BLS employment measure is used, the estimates
indicate that, depending on the discount rate used, saving one job requires defense contract
awards of $59,030 to $92,297 [column (2)]. As discussed earlier, the impact of defense
spending on employment is smaller when the CPS measure is used; this translates into a
range of cost-per-job estimates of $166,259 to $201,653 [column (3)].
Our regression results also point to considerable spillover effects from military contract
26 Hence, an additional dollar in defenseawards to adjoining states in the Census division.
zAOther studies include the Committee for”
Midwest Congressional Coalition (1991),
Schmidt and Kosiak (1992).
Economic Development (1991), the Northeast-
the Congressional Budget Office (1992), and
2ST0 adjust for the lag of expenditures relative to contract awards, we multiPIY the ‘aw
job cost estimates by .6 + [.3/(1 + r)] + [.1/(1 + r)2], where r is the discount rate. This
adjustment is in line with Bolton’s (1966) discussion and reduces the cost estimates by 1.5
to 4.5 percent.260ur reported results are fOr unemployment rates, but significant spillover effects arise
32
spending to a state creates jobs not only in that state but in adjoining states in the census
division. If the job creation in other states is taken into account, the cost-per-job estimates
decline markedly. Our VAR model with spillover effects implies that it costs an estimated
34,000 to 56,0001982 dollars to buy one job-year in the BLS covered sector.
6. Conclusions
The story behind regional labor market fluctuations in the postwar U.S. economy has
a large cast of players: oil price shocks, military contract awards, the basing of military
personnel, other national shocks with uneven effects among regions, other shocks that
influence the cross-industry dispersion of demand within regions – all play important roles
in at least some episodes or certain aspects of the story. But, since the early 1970s, oil
price shocks have been the leading actor in the story – the most important driving force
behind region-specific fluctuations in unemployment rates and employment growth.
Beyond the magnitude and abruptness of oil price movements, the explanation for
their pronounced regional cycle effects has three essential elements: (i) regions differ in
industry mix, (ii) industries differ in sensitivity to movements in the relative price of oil,
and (iii) the reallocation of productive factors across industries and regions is costly and
time consuming. For example, Michigan and Indiana – states with a large concentration
of employment in Transportation Equipment and Primary Metals – experience relatively
high (low) unemployment rates in the aftermath of an oil price increase (decrease). This
regional unemployment response tends to persist for several years. The dominant equi-
librating mechansim that brings regional unemployment rates back into alignment is the
net migration of people and workers between states.
Oil shocks affect the spatial structure of factor demand through their impact on the
for employent as well.
33
industry structure of demand. Some other events operate more directly on the spatial
structure of demand. In this regard, we document clear roles for military contract awards
and the basing of military personnel. Military basing decisions play a relatively important
role as driving forces behind unemployment fluctuations in Alaska, Hawaii and the District
of Columbia. Contract awards play a relatively important role in Delaware, Connecticut
and Washington. Our preferred estimates, which account for spillover effects across state
boundaries, imply a cost of local job creation (through national government purchases
from local firms) equal to 34 to 56 thousand 1982 dollars per job-year based on BLS
employment figures and about twice as much based on CPS employment figures. The cost
of local unemployment reductions are am order of magnitude larger.
The story of regional labor market fluctuations contains important clues about the
nature of aggregate business cycle fluctuations. We mention two. First, the spatial dis-
persion in labor market tightness varies notably over time. Between 1959 and 1992, the
cross-state standard deviation of civilian unemployment rates (conditioning out state and
year fixed effects) ranges from 0.8 to 2.3 percentage points. This measure of dispersion
in the regional cycle component of state unemployment rates displays a clear pattern of
countercyclical movements in relationship to the national business cycle. Our regression
models account for much of the cyclical variation in the spatial dispersion of labor market
tightness since 1973, primarily through the estimated effects of oil shocks.
Second, we find asymmetric unemployment responses to positive and negative regional
shocks. Negative shocks – whether involving oil prices, military basing or contract awards –
have a greater effect than equal-sized positive shocks. This evidence implies that shocks to
the spatial structure of demand (e.g., a reallocation of government contract awards) cause
short-run increases in aggregate unemployment. Our evidence of asymmetry is similar
to Hooker and Knetter’s (1996) findin~ that declines in military contract awards cause
34
larger responses in state-level employment than equal-sized increases. The evidence of
asymmetry in studies of regional fluctuations is complementary to findings of aymmetric
aggregate responses to oil price ups and downs in Mork (1989), Hamilton (1996), Hooker
(1996) and Davis and Haltiwanger (1996,1997).
35
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39
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