How Effects of Local Labor Demand Shocks Vary with the Initial Local Unemployment Rate

This article estimates how effects of local labor demand shocks on labor market outcomes vary with the initial local unemployment rate, which has not been previously studied. The data are on 23 large U . S . metro areas from 1979 to 2011. The article finds that demand shocks to local job growth have greater effects in increasing real wages if the local economy initially has low unemployment. However, demand shocks have greater effects in reducing unemployment, and increasing labor force participation, if the local economy initially has high unemployment, although these differences are only of modest statistical significance. The estimates are based on a new econometric approach to determining the correct dynamic structure for how local labor markets respond to demand shocks. This new approach finds that demand shocks have persistent effects on labor force participation and real wages, but not on unemployment, which contradicts some previous research.