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Which Americans have jobs? The enduring impact of Great Recession location

October 31, 2015

Conference: Topics in Applied Microeconomics

Client: The Becker Friedman Institute for Research in Economics at the University of Chicago

 

 

 

Are unemployed Americans jobless because of where they lived during the Great Recession 2007–2009 recession? Danny Yagan, University of California at Berkeley, delved into data to see if there were lasting effects for those who lost their jobs in more severely depressed regions.

 

As in previous downturns, some area of the U.S. were hit much harder than others in 2007. Phoenix and Detroit, for example, experienced the recession more acutely than places like San Antonio and North Dakota. Yagan concluded that location did have a long-term effect. Americans who were jobless in 2014 were most likely out of work because in 2007 they lived in an area that experienced a severe economic hit and had yet to fully recover. He estimated this causal effect on unemployment to be 1.3 percent.

 

Yagan’s inquiry follows the path of a well-known paper by Olivier Jean Blanchard and Lawrence F. Katz from 1992 that suggests that because workers in the U. can move about the country, they can more easily respond to regional economic setbacks. According to Blanchard and Katz, this mobility allows a region to recover as workers move elsewhere after a wage decline. With less competition for jobs, local employment levels then gradually return to previous levels, usually within about five years after the initial setback. Blanchard and Katz suggest that past employment location would not affect long-term employment.  Yagan wondered in light of their work, whether the 2007–2009 recession might somehow be different.

 

Yagan reached his conclusion that it was by determining first whether states recovered from the recession. He analyzed unemployment and employment rates, population levels, and workforce participation levels. He showed that state employment rates have not recovered during 2009–2014.

Furthermore, while mobility remained similar to what has been seen in previous recessions, labor force participation and employment rates have still not returned to pre–2007 levels. They remain down by about one percent. He argues that expectations about how quickly regional economies recover after a recession may need to be revisited.

 

Yagan then isolated the impact on retail workers specifically. His presumption was that their skills were arguably more transferrable and not related to a regionally-based industry, while retail jobs were much the same anywhere. This approach allowed him to control for skill type and track the workers over time. He examined their progress based on whether they were employed, receiving disability insurance, social security income or any unemployment insurance. He also matched them to their geographic location by using “commuting zones” based on zip code.

 

In the end, Yagan argues, worker mobility did less to help offset the regional impacts than the Blanchard Katz model might have predicted. Workers, Yagan says, moved about the country as they have in previous recessions, except that in this recession, out-of-state migration rates appear to have been unrelated to an incidence of economic setbacks. Rather, local economies returned closer but not all the way back to pre-recession employment levels due to a drop in workers moving in over time.

 

Yagan is still determining what drives this scenario, but he hypothesizes that the lack of a full recovery could be due to a decline in wealth (when the recession hit), combined with a generally reluctant-to-move population and an insufficient return of wages. He believes his findings reject the idea that mobility within the country was enough to help workers endure regional impacts like those experienced in the Great Recession.

 

—Jennifer Roche

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