Academic journal article Economic Inquiry

Asymmetries in the Responses of Regional Job Flows to Oil Price Shocks

Academic journal article Economic Inquiry

Asymmetries in the Responses of Regional Job Flows to Oil Price Shocks

Article excerpt

I. INTRODUCTION

Differences in unemployment rates across U.S. regions and states are well documented. For instance, it is well known that Texas tends to have an unemployment rate that is lower than the national average, whereas other states like Michigan often experience an unemployment rate that exceeds the U.S. national unemployment rate. Yet, little is known about the fundamental labor dynamics behind these differences. Specifically, little is known on how the number of jobs created and destroyed by establishment responds to economic shocks.

In this paper, I study the effect of oil price shocks on manufacturing job creation and job destruction across U.S. states. Recently, Herrera and Karaki (2015) have examined the effect of oil price shocks on job flows in disaggregated manufacturing industries. While work by Herrera and Karaki (2015) contributes to learning about U.S. business cycles, this study contributes to the literature interested in studying regional U.S. business cycles. In particular, this paper investigates the effect of positive and negative oil price innovations on regional job flows and examines whether positive oil price shocks trigger a significant change in job reallocation.

After the 1970s stagflation, economic research on the effect of oil price shocks on economic activity has surged. Many empirical papers found that positive oil price shocks are a major source of economic fluctuations, whereas negative oil price shocks only generate mild and insignificant effects on output. (1) The view that positive and negative oil price innovations have asymmetric effects on U.S. economic activity have been reinforced using slope-based test of symmetry (see Cunado and de Gracia 2003; Jimenez-Rodriguez and Sanchez 2005; Mork, Olsen, and Mysen 1994).

Recently, Kilian and Vigfusson (2011)--hereafter KV (2011)--have questioned the consensus reached in the early 2000s literature on the asymmetry in the relationship between oil prices and output. They claim that previous empirical papers that rejected the null of symmetry in the relationship between oil prices and the macroeconomy are based on censored vector autoregressive models. In their paper, KV (2011) explicitly demonstrate how these models can lead to biased and inconsistent estimates, which often exaggerate the impact of oil prices on economic activity. They further explain why the textbook orthogonalized impulse response functions (IRF)--heavily used in the literature in forecasting the nonlinear impact of oil prices--are not informative about the degree of asymmetry in the response to an oil price shock, and emphasize the importance of computing IRF by Monte Carlo integration that account for the history and the size of the shock (see Koop, Pesaran, and Potter 1996). In addition, KV (2011) show that slope-based tests cannot reveal whether the responses of economic activity to positive and negative oil price shocks are symmetric. Instead, they propose a test of symmetry on the IRF and find that the relationship between oil prices and gross domestic product (GDP) growth (or consumption and unemployment rate) is well captured by a linear model. While there seems to be ample evidence in the recent literature that the null of symmetry cannot be rejected using aggregate macroeconomic variables, work by Herrera, Lagalo, and Wada (2011) shows that the null of symmetry is rejected for some disaggregated industrial production indices.

In theory, oil price shocks affect the macroeconomy through both direct and indirect supply and demand channels (see Kilian 2014). Direct channels imply symmetry in the response of economic activity to positive and negative oil price innovations, whereas indirect channels generate amplifications and asymmetry in the responses. By direct demand side effects, I refer to the change in purchasing power upon an oil price shock, which leads to a symmetric change in aggregate demand (see Baumeister and Kilian 2017; Baumeister, Kilian, and Zhou 2017). …

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