March 1997

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

Steven J. Davis, Prakash Loungani, and Ramamohan Mahidhara


We quantify 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 price shocks have been the leading actor since 1973. Beyond the magnitude and abruptness of oil price movements, the explanation for their pronounced regional 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.

Our study provides estimates of the costs of creating regional jobs and reducing regional unemployment through the awarding of military contracts. Based on the BLS measure of state employment, our baseline specifications imply that creating one local job-year requires national government purchases from local firms in the amount of $56,000 to $91,000 (measured in 1982 dollars). The estimated cost of job creation is more than twice as large for the broader CPS measure. Econometric specifications that consider demand spillovers across state boundaries deliver job creation cost estimates roughly 40-45% smaller.

We find asymmetric unemployment responses to positive and negative regional shocks. Negative shocks -- whether involving increases in oil prices, or scaling back of contract awards and military bases -- have a greater impact 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.

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.

Keywords: Regional labor markets, oil prices, defense expenditures, unemployment

PDF: Full Paper

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