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Regional Business Cycles And The Natural Rate Of Unemployment

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  • Gylfi Zoëga

Abstract

Monetary policy is nearly always formulated on the basis of national-level macroeconomic data. This is in spite of the well-known observation that its impact typically differs across regions and industries. The paper shows how policy making might benefit from closer attention to regional developments. Our model is motivated by micro-econometric evidence that shows the response of wage inflation to vacancies to be non-linear: an increase in vacancies raises wage inflation at an increasing rate. Based on this observation, we use a model of the natural rate of unemployment to show that the greater is the dispersion of regional vacancy rates, the higher is the national inflation rate. Our empirical results show that changes in the distribution of regional unemployment in the United States in the 1990s is attributed, in part, to a falling natural rate.

Suggested Citation

  • Gylfi Zoëga, 2002. "Regional Business Cycles And The Natural Rate Of Unemployment," Economics wp19_zoega, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp19_zoega
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    1. Layard, R. & Nickell, S., 1991. "Unemployment in the OECD Countries," Economics Series Working Papers 99130, University of Oxford, Department of Economics.
    2. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-522, June.
    3. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-793, August.
    4. Gerald Carlino & Keith Sill, 2001. "Regional Income Fluctuations: Common Trends And Common Cycles," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 446-456, August.
    5. S. Lael Brainard & David M. Cutler, 1993. "Sectoral Shifts and Cyclical Unemployment Reconsidered," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 219-243.
    6. Albert Ma, Ching-to & Weiss, Andrew M., 1993. "A signaling theory of unemployment," European Economic Review, Elsevier, vol. 37(1), pages 135-157, January.
    7. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678-678.
    8. 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.
    9. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538-538.
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