Why Does Unemployment Differ Persistently across Metro Areas?

By Rappaport, Jordan | Economic Review - Federal Reserve Bank of Kansas City, Second Quarter 2012 | Go to article overview

Why Does Unemployment Differ Persistently across Metro Areas?


Rappaport, Jordan, Economic Review - Federal Reserve Bank of Kansas City


Unemployment rates differ widely across U.S. metropolitan areas. In 2007, they ranged from 3.1 percent or less among the 25 lowest unemployment metropolitan areas to 6.6 percent or more among the 25 highest unemployment metropolitan areas. Such large differences in metro unemployment rates have held continuously since at least 1990. Moreover, those metro areas that had a relatively high unemployment rate in one year tended to have a high unemployment rate 10 years and even 20 years later.

How can such large differences in unemployment rates persist over such long periods? Why don't households move from high long-term unemployment metros to low long-term unemployment metros in order to improve their chances of finding a job? Why don't firms move from low long-term unemployment metros to high long-term unemployment metros in order to more easily hire workers?

While such moves might seem sensible, they might not actually improve household welfare or firm profitability. A first possibility is that the skills of workers in high unemployment metro areas poorly match the hiring needs of firms elsewhere. Conversely, the needs of firms in low unemployment metros may not match the skills of workers elsewhere. A second possibility is that some metros may have intrinsic characteristics that make households and firms unwilling to move. A third possibility is that high moving costs dampen the mobility of households and firms and, therefore, allow metro unemployment rates to diverge over long periods.

Empirical analysis finds support for all three explanations. Metro workforce characteristics are able to account for the largest share of the variation in metro unemployment rates measured over complete business cycles. Characteristics more intrinsic to metro areas themselves account for much of this variation as well, though not as much as workforce characteristics. And moving costs are estimated to be high enough that some households will be unwilling to move away from high-unemployment metros.

Section I describes in more detail the dispersion and persistence of metro unemployment rates. Section II describes the generally weak effect of metro employment growth on metro unemployment. Sections III and IV describe the separate and combined correlations between the metro workforce and intrinsic characteristics and metro unemployment. Section V describes estimates of the size of moving costs. The concluding section discusses some public policy implications of the results.

I. THE DISPERSION AND PERSISTENCE OF UNEMPLOYMENT ACROSS METRO AREAS

To set the stage for explaining the persistent, large unemployment differences across metros, this section describes these differences in more detail. Throughout the analysis, metro unemployment rates are based on the monthly Bureau of Labor Statistics survey and definition. A person is unemployed if he does not have a paid or unpaid job, was available for work, and sought work over the previous four weeks. The unemployment rate is the number of unemployed workers divided by the sum of employed plus unemployed workers. The analysis that follows focuses on average unemployment rates over the two most recent national business cycles, with approximate peaks in 1990, 2000, and 2007.1

The high dispersion of unemployment rates

The dispersion of unemployment rates across metropolitan areas is typically quite large. Even though it was significantly dampened by a business cycle peak, the dispersion among metro unemployment rates in 2007 was substantial. Sixteen of 308 metros had unemployment rates more than 1.5 percentage points below the national rate; 31 had unemployment rates between 1.5 percentage points and 3.5 percentage points above the national rate; and 11 had unemployment rates more than 3.5 percentage points above the national rate (Chart 1).

The dispersion of metro unemployment rates remained high from at least 1990 through 2011. During this period, the difference between the 95th-percentile and 5th-percentile metro unemployment rates was always at least 4. …

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