Employment, Unemployment and Demand Shifts in Local Labor Markets

Abstract

This paper analyzes the effects of demand shifts within and between local labor markets on unemployment and employment levels and changes observed in those markets. Between-market demand shifts are measured by the means of sales growth for firms in each market, while within-market shifts are measured by variances in each. The variances are also decomposed into between-industry and within-industry components. Some firm-level evidence on job applicants, training and wage and employment adjustments in growing and declining firms is presented as well. The results show that demand shifts between markets account for large fractions of the observed variation in unemployment and employment rate levels and changes across markets. Within-area shifts cause much smaller and insignificant amounts of unemployment if they are between-industry, while shifts within areas and industries (accounting for the vast majority of demand shifts across firms) have no clear effects. The results therefore suggest that the unemployment effects of demand shifts depend on adjustment costs, which appear to be greatest for shifts between markets. Nonlinearities in estimated effects and growing dispersion of unemployment rates across areas also suggest that demand shifts may have raised aggregate unemployment in the U.S. in recent years.