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m a ni nt o p s i l t e c oh

W c o ns ek i nt a l t e xe s h

f ac o s hl f g d i t w o a o p i A

s e x p ew c p rm ( 3 t c t f e a

m v e( 3 t c at l a

F e i nw c ao n at ir eo t f

G = / + 6 C - t 3i 9a101LRt–1+-vat, i = ~,3 ..., ~o, (

w O i t g rr o t r ep o c p a C i t

c hi a p ad il o U d c a T c (

a O s t r eo n ae mg i i z t c o

a l ao p s h

W e st r eu a U d f 1 t 1 E o

t O a o c o ee xt e xp rM e i

s i gi r et a i ni o p b t e c a n

t f o i n da i m c s id f z T e

i mo o p ro e mg i m l i c om

a T t i t o f l i nW m at i

l a c oS 2 ( Pa C P rS 3 ( C a

G P ra S 3 ( N oM at c t “ h

f ac oe fT t i nd n a m t t s v i

t O m e( b d es ha w d f f cI Go t d ii B ( c 5 w c d ( ‘

c oe x pa . t c o nc a p . t l

a wp . t t w ia C e t c i e s

m e

I

o p r i m am e t aa nm o tv e h i ci t w ia l aa f t “ om a n u

c a t e g o r

W i n t e r at he s t i m an a t i or e s p oo i n de m pt o s

w i ts t a t e - l em e a s uo i n d u se m p l os h a( d eb S a f

1OIL~t = – ~(i92001LRt + 02101LRt_1)S28t. (

2

I i i mt n t w c ot t s f S b l i

t b ed eC y T p rr p c c i

e m ps h

c o m

W h y p

w i n cm s ls i s i

t O c op ow s tu m

m eI o w oa o p i nc a s u nr i s

w h ie ms d et i nm a a b a i

c ri o p rO a pa f n or t o p c

a t r eo s ec hi s ti p o

3 I nm a n or et n b c

T d rf oc ot f h t a dt t m m

r er ei d ee vs a w a p d b O t a

e xt t U

b s d i s

b uc yu

b uc T t e t n b c a d

w e t c a n os tr t n

t m ed ea H m v a o

p s ha u nt e xt l o i md f b n

c yw n os te fH f oN a T (

a B a( 1w c oa a de xv t c d

a s ti t s et n ab c d b o “

1

I

d i sl S p ef e s w c oa “ pn c e

o e m pb i n tt n ae mg r r v i t

r e g( w s tm eo i ne ms

1M = ~ S (

2

T s t a tn ac v ap u t e o t m s s

a c hi t s to m op t w d n m d W e

M t c on ew s u n

3 A l ls hw s

P rr ei nt s t t i s o d p a

r i a gu n em ob o f i t p o r

c aw ot j I L( 1D ( D a H ( T

s l i mt s t t s to d w s p a r i s

u n ef l uL m et i o s ‘ Ld

b c o na m eo t d io e mg a i L

g R a T ( a B ra C ( s t t d o

s r ea ci nh m e xp f a u .

W i mt i a t s l b i ni s r a t

I Ts th a l h ii r ee c o n o ld f T ( ‘

F oa N a( 11 T s ts ut s r ew b b t a m l t

r ep es ht i nf oS r d m a o

c c ep rs ub e m pd im b s

r er em i ma s et n a p s t t

d ea l lo l a o f o p r

1

n a t i o nl e v ew i ts t ae m p l o ys h at o b ta s tm ad i si f

e a cs t a tL Rzt d t s r f i i a t t a l R d

t a gs r e1 W ~ ot w d iof industry-level excess

r ew w eg b s te ms

([

7

11

STDISP~t= ~Si~t(Rat– Rt)2 .2=1

W e xSTDISP~t t c p ow s tu n

4 T e fo t d rf o u n

B r e g( 2

P A i T 2 r et e ss o c oo c a l

v ao e i n dv ai o b au nr eT i

p ev aa s b t r es d es t t s g

t e sc ue o a o s td ei i c a l

v aA r e gi ns a y f e s t t c s

p ri n fa t f d t r c c o s

u n ef l uP B r t s tf t j n h

t c ua l av o a i nv h n e p

1 9 1 na a gr ew ec oa v al c ‘

f i re qv au C d f s i g m m

i c o nt r aa p u tF s a tz E xf C a ~ i t c iu nr el 1 c

b t rt

r et f

m a s i

t w il o e xp T l l f C p

t a e x po l c a s B ( W

a df t l i c at c o j c i s 5

20

I

C ot r ef t c iu nr r eF a f d

f ot c o es h t a ns a t n h o n e i

r ea c o ns i gl T e sr m f a u

s td es v c oa t d f O p s h

l e fc oi s t t c or o t u ns c

b t l kv aA s i t t t s o c oo c a l

v ao O i 0 p ep T c oe o c a l

v ao O a t d ev ai a p u nr t a u

s td ec hi O o n o p ep T o i

v ap s mr a d rf b r u nf

R ef t i nu nr a b s b t e

e fo t d rf a m as O c t m a s

d eo t i nu n er a a m s T m d

p et t m iv af w t c os a s a s

i n s iF -s th oi nt c a l v o C

a M a j os i g

E v at b r e( 3 a F 4 a 5

O e sr eh

T

w U i t u n er i s s a t = i a y e a i a s

e ft v eX c oa r e( il o t d v

~ i t e sc ov ea q i a r B o ( w c o

t t o e xt a h w t b r em e t r

c c oo u n ev aT f t f o t a l

2

a nt i mv a r i a t io c r o s s - sd i s p e ri t r e g ic yc o mT s

f oo t v ai t r ec c of i s F t

s o b rw r et r eo t e xf t c u r

o

W p r ed et r ec c oa a d f s a y

f e fi U = U – a – ~ L a d t u s d

o t r ec c oa t t

r 1 1at =

p( 1.,.~–T7J2 , (

5

w h e r~ T ,d e n o tt hu n w e i gm er e g ic yc o m pW r et o a t

“ ad i so t r e

T a st p e ro

c c o

t m i a cf t m a t

v ao a d et c o r“ pd i

r r~ 11P —o’t —

p 1’( - XJ?)2 , (S

w X e qt u nm o t e sr c c

C lt b eo u d eo t o bv i t d f a t

e sc o eW c oOIIQVersion O v ao t l

d ev aa a s “ dv u t m i g

p r eT f v eo a h e la s st o a o t m T

s ev eq ut m oc at e u nv i t

o m ed rf o

F i4 d it t p o o a a a T 3 r r i

T a cd ii t r ec c oo u nr f a

2

....

s td eo l t o p ep i 1 t a 2 p

p oi 1 I o w t d o s d ii l m t

v ac o no t U o bv o t d v i (

t p rd io t r ec c oc t a d

T 3 s t a d ii m ol o a a m v

o t t p rd iT s c ob t t s i .

T d yp rd ir f a s d o r .

p e rp oi s ew s cy a . p p i

a 1 I a v. p ep a c t 1 p p f

a cd i sB t m eo m ed f a f a o

o t a vc r ov ai t r c c o u

f l uF i4 s t t d p rd c m o t

t v a ra cd io t l h as A a d

p rd i sr s hi t a fo t m

1 9a 1

T s t ar ei t l p o 3

o p s 1

a t c o

t f d rf ot m oi W c oa f e b z

o t e sc o eo t o d f B t c i

c o vt c oo d yo d I s t t t T c

i nt a f d rf m a a pc ot e t

l a t v a ro a o p s a t b d f b

r eu n ef l ui t o ft b t a l o

d i sa i t v a

T a st m oa bt e w it v i t r

c c oo f uw p i a a m F e s s

2

w f c aa m eo a v oi t r c c

T[ x11

g = ( r,st — ~r,s)2 I

t=l

(lo)

a a m eo p rv o

T[ x11

~P =s xs@ – x.@2 . (11)

t=l

T v ao O f t 5 s a s i F 5 b t h o t w

p oo t b T d p oo t b r e[ – o t i a d

b p la t w b i no p ra a d b b t z

l i nu p rT p rv @ a g u t m

i n tg ep ro t l d ev aT f s t

p rv ao w i tv ol u w w a v W t i

a t et o v e( o o 5 s tt f d n s a d

p at t p re r

T 4 r es us tf o a a a a b i a l p

t f oo t c o no t i nd f O a o p

s he ma t s m i md f T a e i f

r eu n ef l ui h fs s a M I a

O T m iv am s c ot r u f

t i t “ as b l c oi s s F e o

i l f C o na W aw i nt p c a h

b a i ms oo u nf li t s o i l

Z la cv ao t l d ev aa u a a ~ a v c

f a le s t

24

f A lt D io C oa H W a N M h b

s ut l at a vs t t i ns o d j b t

r e ll v af @ ’ [

4.3

a

S p i( T5

T 5 r et r eo a r es pv f t c a

m ip ev aT f ac oo s a o e

w s e s pv ab t s td eo t c oo

m ee CONR i s i dt C

C hi t b o m ip eg t s e i a

t a i c ot d o we T c os o . a

t ie sa c t z i b r eT c oo n

o e fa t s pe fs ut m b d h i

b h il oe fo r ee c

I c ot s pe fo p c a a l a s

s i gI t c iu n er r et e c s o

CONR i t a l a

a f v at f i

s th a b ie

T c h a r

t c o rs f t o v C T

i nt ~ c m e xi s

t e p capitao we x

o r el m b i n c i

b lb i i w t r t f eo t p c d F s

a h e x po f b t b oo t p c s

z t r el l m aa l c a pb C r t

b U s tt a r e se xm i c t t i m t

a o wm e

25

I

S ee x pt yl s ob c a a t i c

e rv aa r ai t l o l B f i e i

t C a CONR v aa m eo e xb t m e

c oi p rm s mi t r ev s a

a m l it r ew t r t t s a t r c

o t t il i m l t a o a t r l T w s t

m e ae u nt r el s pe o c a b

q u at e xa i no m ee i a t f a o

R e go i n t eT 5 h it d o i r s

e fi e v at l e ce o c a

A s ye f( 6

S tr b uc m t i na r f o p s [

K a L o( 1p rt t r eo r a t p a n

o p s hi r os yI t c o m o s o t

w ec ho t hs ue i a a p f

S o r ed a d ib t “ aa “

c ht hw o s a a ga [ D ( L

( 1M ( 1a D a H a( 1I o s a t m

b et d ea a d io f i a i t a f i

t p ro r e af i t n u e a d i o p i

a n ee fo a go a e mT t e t o s

i na ga ct ha la w a a c p i

h l an e ft p d eW i nw a o t

s a i mi T 6 b a ln a p v o O t e

26

I

s e pi t u n er eS a c b m f m

e x ps w a a C C a I t h a e

T e vi T 6 s ut t o a sp b t t

s tt a l la so o a m is I t c u r

r e gt e se fo n ec i o a r c

a wa n et a l a t e o p c T a i e

m d rf m ip ec hT e f O p t a m

a s y m m e ti t hc i v i lu n e m p l or e g r ea a s ha s yi t i n

u n er r eT d ef s i c w t v

t t i mo o p o r a cw t a m o b “

a ‘ L ac h

W t e vi T 6 f t a sp rt h t r

s r ei P B r t m o t e i w T h o e

c o es o p oa n ev i r a c os l

e o f t m ip ev ai t c u nr a f

t o s v ai t i nu nr eT h o i

d i sl o p oa n ev i r f t c s v

i b r e ga f t m ip ev i t c u

r e g

5. T j d yo u n ee ma p a

5 A P V M w O S a C A

T i n vt j d yo r el m v w s a

V m t i nO C log e m( t c u

r (UN), a t l f p a rr ( E sw a t O

27

a nCON v at t V s c ob B a K ( W

i n cr es pe fo C i a m s o b I l o o

e ad i so e xw i da s tV b i t f

c ao ro t r e di n(OIL, CON, EMP, UN, PART).

R eOIL a C i t o rd n a t r

W e st V o p d f t 5 s o t 1 t 1 p

W i nt l o e v aa f s a y f e a i

c os c o ea s tF A a A i A A d a

c os o i mr ef uc ot t e V a t

c ao rs pa I t m t w r a t t r o

l m av at OIL a C i m

F i6 s t d yr et a u s d OIL s T

p e fo t B e mm i a d o 0 p a t y

n y l e ms l 0 p b i i l T p i

o u n ei a r o s lo 0 p ep o y a t i

U n er et i i nl i s y T e o p a

s a p e rT e fo a n eu s d s t C

s i F i7 a q u as b s i m T p r

i t B e mm ei a 0 p d t y a t i

T r es ut B k me o t r o m a t

“ da dm ei r et r s T i f

b e c a u st hs uo p a r t i c i p aa nu n e m p lr e s pi m s mt t

Q s Ea e iv aV m a u t ordering (0~-L, cON~ ~~x?

EMP, UN, PART, STDISP, MIL) y r s t t o d i t

t

28

. : , ,, .

employment response. This pattern is especially pronounced for the longer term response,

but even the impact effects are dominated by employment adjustments, suggesting a rapid

migration response.

To investigate the sensitivity of these conclusions to the employment measure, we

re-estimate the VAR using the CPS employment measure in place of the BLS measure.

Figures 8 and 9 display the BLS and CPS employment response functions implied by the

two VAR systems. According to Figure 8, the impact effect of an oil price increase on the

two employment measures is nearly idential, but the longer term responses differ greatly.

In particular, the longer term CPS employment response is about one-half larger than

its impact response and about one-half larger than the corresponding longer term BLS

employment response. Evidently, longer term migration responses are considerably larger

than the initial employment impact, and this additional effect involves employment losses

in sectors not covered by the BLS measure.

Figure 9 also illustrates important differences between the impulse response patterns

for the BLS and CPS employment measures, but of a quite different nature. The impact

effect on CPS employment is virtually zero, and the CPS response function lies everywhere

above the BLS response function. This result indicates that the negative BLS employment

response to a decline in military contracts is partly offset by employment increases in BLS

uncovered sectors. As a corollary, the implied migration responses to military expenditure

shocks are smaller than suggested by VAR models that focus on the BLS employment

measure.

In summary, Figures 6-9 support the following conclusions. First, most of the impact

effects of negative regional shocks show up as declines in the regional cycle component of

unemployment and participation rates. That is, the migration of jobs and workers does

not occur rapidly enough to immediately dissipate the local unemployment effects of local

29

shocks. Second, the longer term imprint of regional shocks largely involves changes in the

regional distribution of employment and the work force, rather than persistent differences

in the regional cycle component of unemployment and participation rates. The migration

of jobs and workers dissipates the

few years. Third, the longer term

by negative regional shocks greatly

local unemployment effects of local shocks within a

employment losses (and migration outflows) induced

exceed the initial employment losses. In other words,

regional shocks impart a certain momentum to regional employment growth that persists

for several years. Fourth, apparent responses of the BLS employment measure to oil and

military impulses partly reflect effects on the distribution of employment between BLS

covered and uncovered sectors.

5.2 Incorporating regional spillovers into the VAR model

Section 4 finds large spillover effects of military contract awards on

rates. Motivated by this finding, we introduce spillover effects into our VAR

explain how to calculate impulse response functions that account for them.

unemployment

framework and

We then apply

the expanded VAR model to calculate the cost of creating jobs and reducing unemployment.

The CONR values are linked to the CON values by a set of linear identities, so

we need not expand the dimension of the VAR to accommodate spillovers. Instead, we

simply introduce the current and two lags of CONR on the right side of each regression as

an exogenous forcing variable. The main issue is how to appropriately calculate impulse

response functions for military expenditlmx. In discussing this matter, it will be convenient

to alter notation slightly as indicated below.

Let POP(RIS’) and DEF’(RIs’) denote population and real contract awards, respec-

tively, in region R, less the corresponding value for state s’. Then, assuming that year-

to-year population changes are small, we can approximate CONR for state s’ at t as

30

follows:

(12)

DEFt(s) POPt(s)

POPt(s) POPt(RIS’) 1[

~ A DEFt(RIs’, s)1 [DEFt(s)APopt(s)

POP JRIS’) + PoPt(s) POPt(Rls’) 1

Hence, the impact of an impulse to CONt(s) on CONRt(s’) equals the coefficient

IPOPt(s)/POPt(Rls’ )]. (This coefficient is invariant to the size of the CON impulse

under the approximations

Taking the average of this

used in (12). ) Summing over s’ E R, s’ # s, delivers

~O~~(s) ~[1/POPt(Rls’)].s’#s

expression for the states in the region gives

(13)spILLt(R) = ; ~ F’OP,(S) ~[1/p@’t(Rk’)].

SER s’#s

Thus, to capture spillover effects in the VAR impulseresponseanalysis,weshockthe

CONTRterm by SPILL times the size of the CON impulse. To capture the combined

effects of own-state and spillover effects. we simultaneously introduce a unit CON shock

and a CONR shock of SPILL units.

According to (13), we have potentially different time-varying values of SPILLt(R) for

each region. However, simple algebra shows that equal-sized states within a region implies

SPILL = 1. We maintain this value for WILL in our cost-of-job calculations below.

31

I

5.3 Military spending and the cost of jobs

Recent studies by government agencies, congressional

organizations reach vastly different conclusions about the

coalitions and private research

regional and economywide im-

plications of the post-Cold War defense cutbacks. In her study based on county-level

data, Guthrie (1993) estimates that a $1 million decline in prime contract awards lowers

employment by 9 to 50 workers.24

We use our unemployment regression and VAR models to estimate the cost, in terms

of national government purchases from local firms, of creating local jobs and reducing local

unemployment. We express these costs in present value terms using annual discount rates

of 3, 5 and 10 percent.25 The resulting calculations deliver estimates of the present value

cost of creating one job-year and of reducing unemployment by one person-year.

Table 7 reports the results. When the BLS employment measure is used, the estimates

indicate that, depending on the discount rate used, saving one job requires defense contract

awards of $59,030 to $92,297 [column (2)]. As discussed earlier, the impact of defense

spending on employment is smaller when the CPS measure is used; this translates into a

range of cost-per-job estimates of $166,259 to $201,653 [column (3)].

Our regression results also point to considerable spillover effects from military contract

26 Hence, an additional dollar in defenseawards to adjoining states in the Census division.

zAOther studies include the Committee for”

Midwest Congressional Coalition (1991),

Schmidt and Kosiak (1992).

Economic Development (1991), the Northeast-

the Congressional Budget Office (1992), and

2ST0 adjust for the lag of expenditures relative to contract awards, we multiPIY the ‘aw

job cost estimates by .6 + [.3/(1 + r)] + [.1/(1 + r)2], where r is the discount rate. This

adjustment is in line with Bolton’s (1966) discussion and reduces the cost estimates by 1.5

to 4.5 percent.260ur reported results are fOr unemployment rates, but significant spillover effects arise

32

spending to a state creates jobs not only in that state but in adjoining states in the census

division. If the job creation in other states is taken into account, the cost-per-job estimates

decline markedly. Our VAR model with spillover effects implies that it costs an estimated

34,000 to 56,0001982 dollars to buy one job-year in the BLS covered sector.

6. Conclusions

The story behind regional labor market fluctuations in the postwar U.S. economy has

a large cast of players: oil price shocks, military contract awards, the basing of military

personnel, other national shocks with uneven effects among regions, other shocks that

influence the cross-industry dispersion of demand within regions – all play important roles

in at least some episodes or certain aspects of the story. But, since the early 1970s, oil

price shocks have been the leading actor in the story – the most important driving force

behind region-specific fluctuations in unemployment rates and employment growth.

Beyond the magnitude and abruptness of oil price movements, the explanation for

their pronounced regional cycle effects has three essential elements: (i) regions differ in

industry mix, (ii) industries differ in sensitivity to movements in the relative price of oil,

and (iii) the reallocation of productive factors across industries and regions is costly and

time consuming. For example, Michigan and Indiana – states with a large concentration

of employment in Transportation Equipment and Primary Metals – experience relatively

high (low) unemployment rates in the aftermath of an oil price increase (decrease). This

regional unemployment response tends to persist for several years. The dominant equi-

librating mechansim that brings regional unemployment rates back into alignment is the

net migration of people and workers between states.

Oil shocks affect the spatial structure of factor demand through their impact on the

for employent as well.

33

industry structure of demand. Some other events operate more directly on the spatial

structure of demand. In this regard, we document clear roles for military contract awards

and the basing of military personnel. Military basing decisions play a relatively important

role as driving forces behind unemployment fluctuations in Alaska, Hawaii and the District

of Columbia. Contract awards play a relatively important role in Delaware, Connecticut

and Washington. Our preferred estimates, which account for spillover effects across state

boundaries, imply a cost of local job creation (through national government purchases

from local firms) equal to 34 to 56 thousand 1982 dollars per job-year based on BLS

employment figures and about twice as much based on CPS employment figures. The cost

of local unemployment reductions are am order of magnitude larger.

The story of regional labor market fluctuations contains important clues about the

nature of aggregate business cycle fluctuations. We mention two. First, the spatial dis-

persion in labor market tightness varies notably over time. Between 1959 and 1992, the

cross-state standard deviation of civilian unemployment rates (conditioning out state and

year fixed effects) ranges from 0.8 to 2.3 percentage points. This measure of dispersion

in the regional cycle component of state unemployment rates displays a clear pattern of

countercyclical movements in relationship to the national business cycle. Our regression

models account for much of the cyclical variation in the spatial dispersion of labor market

tightness since 1973, primarily through the estimated effects of oil shocks.

Second, we find asymmetric unemployment responses to positive and negative regional

shocks. Negative shocks – whether involving oil prices, military basing or contract awards –

have a greater effect than equal-sized positive shocks. This evidence implies that shocks to

the spatial structure of demand (e.g., a reallocation of government contract awards) cause

short-run increases in aggregate unemployment. Our evidence of asymmetry is similar

to Hooker and Knetter’s (1996) findin~ that declines in military contract awards cause

34

larger responses in state-level employment than equal-sized increases. The evidence of

asymmetry in studies of regional fluctuations is complementary to findings of aymmetric

aggregate responses to oil price ups and downs in Mork (1989), Hamilton (1996), Hooker

(1996) and Davis and Haltiwanger (1996,1997).

35

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