U.S. Regional Business Cycles and the Natural Rate of Unemployment [dataset]

Howard J. Wall, Gylfi Zoega
2004 ICPSR Data Holdings   unpublished
rate of unemployment. Most often, the estimate is the implied natural rate in an econometric model of the aggregate Phillips curve. The objective of this article is to show that the sole reliance on aggregate data may lead to incorrect inferences about the natural rate of unemployment. We show how regional business cycles might affect aggregate wage inflation and how attention to regional labor market trends can be useful for understanding the aggregate labor market. Moreover, we show how the
more » ... , we show how the natural rate of unemployment may depend directly on the dispersion of economic activity across regions. Our regional approach is in some ways parallel to the sectoral approach of Lilien (1982), Abraham and Katz (1986), and Brainard and Cutler (1993) . Lilien (1982) found that a measure of sector-specific disturbances accounted for a significant portion of the variation in aggregate employment: When an industry sheds redundant labor in less time than it takes for the affected workers to find employment elsewhere, unemployment rises when the pace of sectoral reallocation of labor (and capital) increases. Abraham and Katz (1986) pointed out that Lilien's estimates might exaggerate the role of sectoral disturbances by failing to take into account differences in the sensitivity of different industries to macroeconomic shocks. Brainard and Cutler (1993) developed a data series to measure the intensity of reallocation shocks. They constructed a time series of the variance of sectoral stock market excess returns and found that they had a modest-though statistically significant-role in explaining aggregate employment fluctuations. Our paper follows recent work illustrating the significant regional differences in economic conditions, business cycle dynamics, and reactions to monetary policy. Overman and Puga (2002) demonstrate the increased polarization of unemployment
doi:10.3886/icpsr01296 fatcat:teqi5scphvcgjanx7pgbxxoqae