Currency Areas, Labor Markets, and Regional Cyclical Sensitivity

In his papers during the lead up to the birth of the European Monetary Union, Obstfeld considered whether the countries forming the EMU were sufficiently similar to survive a single monetary policy—and more importantly, whether they had the capacity to adjust to asymmetric shocks given a single monetary and exchange rate policy. The convention at the time was to take the United States as the baseline for a smoothly functioning currency union. We document the evolution of the literature on regional labor market adjustment within the United States, expanding on stylized facts illustrating how stratification in local labor market outcomes appears far more persistent today than 30 years ago in the context of what Obstfeld and Peri (1998) call non-adjustment in unemployment rates. We then extend the currency union literature by adding an additional consideration: differences in regional cyclical sensitivity. Using measures of cyclicality and Obstfeld-Peri-type non-adjustment, we explore the characteristics of places that can get left behind when local labor markets respond differently to national shocks and discuss implications for policy.