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U. S. regional business cycles and the natural rate of unemployment

  • Howard J. Wall
  • Gylfi Zoega

Estimates of the natural rate of unemployment are important in many macroeconomic models used by economists and policy advisors. This paper shows how such estimates might benefit from closer attention to regional developments. Regional business cycles do not move in lockstep and greater dispersion among regions can affect estimates of the natural rate of unemployment. There is microeconomic evidence that employers are more reluctant to cut wages than they are to raise them. Accordingly, this means that the relationship between wage inflation and vacancies is convex: an increase in vacancies raises wage inflation at an increasing rate. Our empirical results are consistent with this and indicate that if all else had remained constant, the reduction in the dispersion of regional unemployment rates between 1982 and 2000 would have meant a two-percentage point drop in the natural rate of aggregate unemployment.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-030.

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Date of creation: 2003
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Publication status: Published in Federal Reserve Bank of St. Louis Review, January/February 2004, 86(1), pp. 23-31
Handle: RePEc:fip:fedlwp:2003-030
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  1. S. Lael Brainard & David M. Cutler, 1990. "Sectoral Shifts and Cyclical Unemployment Reconsidered," NBER Working Papers 3491, National Bureau of Economic Research, Inc.
  2. Gerald Carlino & Keith Sill, 2000. "Regional income fluctuations: common trends and common cycles," Working Papers 00-8, Federal Reserve Bank of Philadelphia.
  3. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
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  9. Kenneth J. McLaughlin, 1999. "Are nominal wage changes skewed away from wage cuts?," Review, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  10. Henry Overman & Diego Puga, 1999. "Unemployment Clusters Across European Regions and Countries," CEP Discussion Papers dp0434, Centre for Economic Performance, LSE.
  11. Gerald Carlino & Robert Defina, 1998. "The Differential Regional Effects Of Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 572-587, November.
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  16. Fratantoni, Michael & Schuh, Scott, 2003. " Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-89, August.
  17. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  18. Hoon, Hian Teck & Phelps, Edmund S., 1997. "Growth, wealth and the natural rate: Is Europe's jobs crisis a growth crisis?," European Economic Review, Elsevier, vol. 41(3-5), pages 549-557, April.
  19. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  20. Michael T. Owyang & Howard J. Wall, 2004. "Structural breaks and regional disparities in the transmission of monetary policy," Working Papers 2003-008, Federal Reserve Bank of St. Louis.
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