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

Abstract

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 req