Local Multipliers, Unemployment and Migration: An Empirical Analysis of the United States

I show that the nontradable sector of a regional economy benefits from attracting jobs in the tradable sector. I find that on average one new job in a tradable industry in a city will attract 1.02 extra jobs in the nontradable sector of that same city. This local multiplier effect increases with the unemployment rate, as the labour market becomes more elastic. The extra jobs created in the local nontradable labour market are mainly fulfilled by workers from other regions. I do not find a significant multiplier in the nontradable sector for current inhabitants. These findings are important for regional economic policy, as they suggest that cities with a high unemployment rate will be most successful at increasing local employment levels by attracting tradable industries, but their current residents are not likely to benefit from the additional multiplier. Currently the U.S. emphasize 'labour supply policies' to reduce poverty. These policies consist of a direct interaction with the unemployed to increase the quantity or quality of their labour supply. Common examples are job training or welfare reform policies that make it harder to get benefits. There is little emphasis on 'labour demand policies'. Labour demand policies stimulate employers to provide more jobs or increase the quality of their jobs (Bartik, 2001). Bartik argues that a successful reduction of poverty will only be achieved by a combination of both policies. A key aspect of understanding labour supply policies is the interplay between jobs in the tradable and jobs in the nontradable sector. Attracting jobs in the tradable sector can be especially effective in low growth regions with high unemployment because this will induce the most extra jobs in the nontradable sector. Insights in the effects of the tradable sector on the regional economy is therefore crucial for the development of regional policy. In short the increased employment in the tradable sector increases the total income in a region and therefore allows for more consumption by the local inhabitants. Depending on the preferences of the inhabitants this will increase demand for non-tradable goods and depending on the technology required to produce these goods, this will increase employment and wages in the non-tradable sector. Therefore the size of the local multiplier will depend on many factors, such as the type of new jobs in the tradable sector, the unemployment rate in a region and whether it is urban or rural.