Academic journal article Economic Perspectives

Regional Employment Growth and the Business Cycle

Academic journal article Economic Perspectives

Regional Employment Growth and the Business Cycle

Article excerpt

Introduction and summary

The purpose of this article is to study the sources of regional employment fluctuations in the U.S. and to shed light on the interactions of these regional fluctuations with the aggregate economy. Many studies of regional employment growth have analyzed the effect of regional differences in a number of underlying factors, such as local government expenditures and tax policy, while controlling for aggregate economic activity. My analysis focuses alternatively on the role of regional fluctuations in determining aggregate economic activity.

Macroeconomists have tended to concentrate on the impact of changes in aggregate factors in determining the business cycle. [1] Such aggregate factors have included, for example, fiscal and monetary policy, the role of consumer confidence, aggregate supply and demand, and productivity. Yet there is a growing literature that suggests that aggregate disturbances are the result of a variety of influences. [2] In the work introduced here, I explicitly consider the role of regional employment fluctuations in determining the business cycle. I do not specifically identify the sources of such regional shocks. They could be the result of changing federal governmental policies, for example, immigration or defense spending, that impinge upon certain areas of the country more than others. They could also reflect changes in local welfare programs or shifts in local fiscal and tax policy.

The analysis is complicated by the fact that while regional fluctuations may have aggregate repercussions, aggregate factors influence regional growth as well. For example, general productivity shocks are likely to have broad consequences across a variety of industries and geographical areas that are reflected in regional employment growth. Ascertaining what movements in employment growth are common across regions and what are region-specific would be helpful for policymakers. If, for example, regional employment growth is largely unrelated to employment growth in other regions, a more regional policy focus might be appropriate. Examples of more localized policy would include differential taxation and spending programs that are coordinated within a region or a more geographically targeted approach to federal government spending. If, however, most regional employment growth is common across regions, a more centralized policy process is warranted.

The business cycle has been conceptualized as "expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle." [3] Thus, the business cycle is characterized by comovements among a variety of economic variables and is observable only indirectly. Only by monitoring the behavior of many economic variables simultaneously can one quantify the business cycle. For example, recessions are typically associated with declining output and employment across broadly defined industries. It is this notion of comovement that has supplied the foundation for measuring cyclical activity. This is the practice behind the widely publicized National Bureau of Economic Research's (NBER) dating of business cycles and Stock and Watson's (1988) index of coincident economic indicators.

While most analyses of the business cycle focus on the notion of comovement in employment or output across industries, a great deal of comovement exists across geographical regions as well. Yet, until recently this regional cyclicality has gone largely unexplored, with a few notable exceptions such as Altonji and Ham (1990), Blanchard and Katz (1992), Clark (1998), and Clark and Shin (1999). The reason for the lack of interest in the regional cycle has largely been the belief that whatever cyclicality a geographical region experiences is due in large part to its industrial mix and to common aggregate shocks. In fact, regional shocks are typically not considered in assessing the business cycle. …

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