Regional Variance in Unemployment is High
Los Angeles, I'm Yours
In a very simple model of how the United States works, we’re a single country composed of a single labor market, and would-be workers should effortlessly migrate from places where there are no jobs to places where firms are looking to hire. In the real world, things are quite different, as this list of unemployment rates by metro area makes clear. Ryan Avent observes that “Rates differ dramatically across metros. There is a surprisingly large number of metro areas with unemployment at 7% or below.” Indeed, just looking at big cities, in Los Angeles/Long Beach/Santa Ana the unemployment rate is 10.1 percent whereas in Boston-Cambridge-Quincy it’s just 7.2 percent, in Dallas it’s 6.6 percent, and in Washington/Arlington/Alexandria it’s 5.6 percent. In greater Washington, unemployment has increased 2.6 percentage points since April 2008; in Los Angeles it’s 4.5 percentage points.
In theory, people should be moving in droves from LA to Washington, eliminating the difference, and ultimately boosting overall employment. In the real world, of course, households and families don’t operate on a frictionless plane of labor mobility that perfectly matches people with job opportunities. And part of the story of this recession is that because of the housing link, people are having unusually difficulties with relocation. That’s going to make recovery harder. A lot of people in Michigan and the Inland Empire, in particular, are going to find that they can’t really afford to leave where they are in search of better opportunities elsewhere.
This is, however, going to be an even bigger issue in Europe. On paper, the European Union has created an American-style integrated continental market. In reality, however, they still speak Spanish in Spain and Dutch in the Netherlands, and different countries remain different countries. Thus to an even greater extent than in the United States, Europe finds itself with limited labor mobility and a labor market that doesn’t live up to the rapidly transition ideal. That’s one very good reason to believe that European recovery will be slower than what we see in the United States.
28 Responses to “Regional Variance in Unemployment is High”
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June 5th, 2009 at 8:50 am
In theory, I think you are overlooking an important point. A jobless rate of 5.6% in the DC area does not mean there are a surplus of jobs people from the 10.1%-unemployment-rate LA should move for. Fewer people out of work does not mean there are jobs to move.
I’m no economist but I have finished most of a double espresso. All your theoretical thinking on this toppic would achieve is a balancing of the distribution of the unemployed.
June 5th, 2009 at 9:10 am
@1 AutomaticMojo “I’m no economist but I have finished most of a double espresso.”
I stayed at a Holiday Inn last night, and had an epiphany when I awoke.
We need to put 5% of the unemployed to work building boxcars in order to transport the remaining 10% of the unemployed back and forth across the country. To better achieve a more perfect balance.
June 5th, 2009 at 9:19 am
Just kidding. An interesting post actually. I never thought about the potential rigidity of the European labor market.
Hey, is that the blurred lights of a bullet train in the foreground of the picture; speeding thru an LA suburb, heading toward the promised land of the downtown sector?
June 5th, 2009 at 9:22 am
Surely DC’s low unemployment rate has a great deal to do with its status as home to the federal government.
June 5th, 2009 at 9:27 am
AutomaticMojo is partially right. As a rough rule of thumb, around a 5% unemployment rate is what you would expect if there was little or no cyclical unemployment, with the 5% being frictional unemployment. So if an area is already above 5% unemployment, more people moving there is just going to add to cyclical unemployment.
That said, your prospects of getting a job are still better in an area with 6% unemployment than an area with 10% unemployment, all else being equal. That is because there are still going to be positions opening, even if net jobs are not increasing (or indeed are decreasing), so your odds of getting one of those positions is better.
So, I think AutomaticMojo is right that in a frictionless model where there is already cyclical unemployment everywhere, it is true that moving would just even out the distribution of unemployment. But it would be rational for that to happen.
By the way, Matt is setting this up as a contrast between theories/models and reality, but of course the theories/models people actually use in this context take into account the friction arising from the various reasons people have for not wanting to move. So I think the better way of phrasing his point is that due to the widespread housing crisis, that friction may be higher than usual (although maybe the opposite is true for renters–this is probably a relatively good time to be moving if you don’t need to sell a place).
June 5th, 2009 at 9:28 am
I think if anything this post highlights the serious flaws in middle-class home ownership. Not only can owning your own home get you into trouble in a financial sense, it also makes it much, much harder to move when you should.
June 5th, 2009 at 9:44 am
You’re all overlooking some very obvious things:
– family ties: many people prefer to stay close to family
– friend ties: many people become established in an area, and don’t want to ditch long established friendships. This gets to be more and more the case the older you get
– kids: Once your kid(s) reach middle school, asking them to ditch their friends gets to be much, much harder
– spouse: Just because one spouse has lost a job says nothing about the other one. When both people work, relocating becomes a whole lot harder
The problem of selling a home is real, but it’s not the only problem by a longshot.
June 5th, 2009 at 9:45 am
These will always be friction, but that doesn’t mean there won’t be significant movement on the margins. One would assume that those who can move with the least friction would do so. It would be interesting to see whether, for example, this years’ graduating classes from UCLA and USC are moving to Washington in larger numbers.
June 5th, 2009 at 9:49 am
You’re all overlooking some very obvious things . . . . The problem of selling a home is real, but it’s not the only problem by a longshot.
I noted above, admittedly without enumeration, that there are “various reasons people have for not wanting to move.” But insofar as the need to sell a home is one of those reasons, a widespread housing crisis will in fact likely increase the total amount of friction (at least among homeowners).
June 5th, 2009 at 9:56 am
DTM,
My job allows me to live anywhere – meaning that it would make a ton of economic sense for me to leave high cost Maryland for lower cost states like Florida, Texas, or possibly one of the upper plains states. I don’t though, because:
– we have friends who we’ve known for 20+ years now
– we have family in the area
– my wife’s job is 15 miles from the house, and involves a specific physical location
If I lost my job, and had to sell the house, relocating would still be well down our list, simply due to the reasons listed above. Sure, home ownership increases the difficulties in moving – but other things do as well.
Not to mention: Do you really want a nation of highly mobile, utterly disconnected from their communities people?
June 5th, 2009 at 10:06 am
Regarding the point about Europe and the effects of language on labor mobility: I think a mitigating factor there might be the widespread use of English as a lingua franca in Europe. Once you pass a certain minimal education threshold, the use of English to bridge any language barriers becomes increasingly common. This is just anecdotal and I don’t have any statistics to back it up, but if I had to guess I would say that there is a ’steeper curve’ in European labor mobility, relative to education. So workers on the lower end of the education scale would be even less mobile than they are in the states, but that gap would narrow further up the education scale. Once you get into areas like high-finance and academia (i.e. Europeans who are extremely likely to speak English), my guess would be the difference in mobility would almost disappear. (There would be a similar mitigating factor in terms of just the higher level of bilingualism in Europe, regardless of whether the second language is English or not.)
June 5th, 2009 at 10:08 am
There’s a great animation at Tips Strategies showing variations in employment growth and loss between metros, and Jim Hamilton has a presentation showing how recessions between 1969 and 2004 have spread regionally. The links are here:
http://residentialpropertyanalytics.blogspot.com/2009/06/geography-of-job-losses.html
June 5th, 2009 at 10:10 am
James, you are just not getting the basic premise here (surprise), all you are doing is enumerating the things that make up what DTM has analogized to “friction.” Your personal “friction” may be higher than other people’s “friction,” but that information isn’t particularly relevant. Even in your case (assuming you own a home), difficulties in the housing market will tend to increase your “friction.” The fact that this is swamped by your already higher value just means a) your increase will be smaller than other people’s, and b) your increase isn’t likely to change your outcome – you aren’t moving even without it barring some extreme, and extremely unlikely, circumstances.
June 5th, 2009 at 10:12 am
James Robertson,
To repeat, to my knowledge no one is claiming that the need to sell a home is the only reason for friction in the movement of labor. But are you denying that increased difficulty in selling homes will marginally increase the friction in the movement of labor, at least among homeowners? Because nothing you have noted so far suggests that wouldn’t be true.
Do you really want a nation of highly mobile, utterly disconnected from their communities people?
I didn’t say that I did–everything I have written so far is purely descriptive, not normative. And not that you necessarily should have been keeping track, but in the past I actually have defending here the merits of a public policy which somewhat encourages home ownership, and you just mentioned one of the reasons why (it encourages all sorts of investment in communities).
But I nonetheless have to admit that home ownership increases labor market friction in times like these, because that is simply true. The question then becomes whether the various benefits of homeownership outweigh the various costs of homeownership. And while I think they can as a general matter, I also think we swung the balance the wrong way recently, meaning through things like poorly-regulated mortgage markets and excessively low interest rates, we encouraged too much investment in homes.
June 5th, 2009 at 10:18 am
All I’m trying to point out is that home ownership is one friction among many, and it may not be the most relevant one.
June 5th, 2009 at 10:22 am
Nice Decemberists reference in the pic caption Matt. I get to see them tonight!
June 5th, 2009 at 10:24 am
All I’m trying to point out is that home ownership is one friction among many, and it may not be the most relevant one.
Fair enough. And I don’t think anyone is arguing otherwise.
June 5th, 2009 at 10:26 am
Yes, but about the only part of the European economy that’s truly as mobile as the U.S. economy is short-term capital investment. They’re moving in the U.S. direction, but if you analyze long-term investment capital flows you won’t find nearly the same dynamism. Only a small proportion of European companies have truly reached the point where they can have their corporate headquarters in Paris, but their manufacturing sites in Sweden, the UK, and Poland.
I wouldn’t spend your nights worrying about the European labor market’s ability to cope with this problem.
June 5th, 2009 at 10:31 am
Its worth noting that many areas with an overstock of workers, like Las Vegas, don’t present many constraints to migration beyond the ability to unload one’s house. Most of the Sun Belt’s housing boom fueled population are (obviously) new regional residents without any real ties to the area beyond economic opportunity.
June 5th, 2009 at 10:39 am
In theory, people should be moving in droves from LA to Washington, eliminating the difference,
if anything this post highlights the serious flaws in middle-class home ownership. Not only can owning your own home get you into trouble in a financial sense, it also makes it much, much harder to move when you should.
Put these two together, and what you get is the problem with economic thinking that reduces families and individuals to labor widgets. Family, friends, community, these are luxuries for the upper and upper-middle classes, everyone else is a widget.
June 5th, 2009 at 10:50 am
So workers on the lower end of the education scale would be even less mobile than they are in the states, but that gap would narrow further up the education scale.
It’s somewhat more complicated than that: if you want to work in a multinational office environment where the lingua franca is English, you can do that in lots of places, especially the Netherlands or Scandinavia. But if you’re a Polish bricklayer, you only really need a foreman who speaks the local language to work anywhere in the EU. And if you’re willing to pull pints or serve coffee in London, nobody seems to care where you’re from. So you still have geographical mobility at the lower end, but you don’t necessarily have the same mobility within the job market in those different locations. So I’d say the greatest immobility lies squarely in the middle of the middle class.
There might be friction in the US — if you’re a schoolteacher in Michigan, you may not want to move to New Mexico because of the retirement benefits that come from staying in one state’s system your whole career — but it’s very different from a schoolteacher in Lithuania moving to Portugal.
June 5th, 2009 at 11:28 am
Matt, you’re ignoring the scale of the distances. Madrid to Amsterdam is about a third the distance of going from LA to DC.
Hell, going from Lisbon to Warsaw is about half as long. And that’s essentially the extent of the EU.
The population density over there is so high that this comparison makes very little sense.
June 5th, 2009 at 11:34 am
It’s interesting to see a discussion on the Internet that assumes that friends and community are defined by your physical location.
Just saying.
June 5th, 2009 at 12:06 pm
My third-year paper in econ grad school is going to be about modeling precisely this effect!
Yay!!
June 5th, 2009 at 12:56 pm
The times, they are changing…
I am in my forties, and over the last 20 years worked in 3 European countries, with three different languages not being English and always using the local language. A good education, but no finance or academia.
The interesting point: I have chosen twice to change countries when changing job because of the job market, the salary and general conditions.
Ok, I liked the idea to discover a new language/country, but I basically considered clinically the different job markets of which I spoke the language and acted like the vaunted homo economicus (no family attached).
True, to date I am not fully representative. But I am not an exception anymore.
I was too early for the Erasmus programm, but it is now 20 years old, and it makes such cases like mine much more likely. Learn about it.
June 5th, 2009 at 4:09 pm
I think Matt concedes James Robertson’s point when he says In the real world, of course, households and families don’t operate on a frictionless plane of labor mobility that perfectly matches people with job opportunities. before even mentioning the home ownership problem. But Europeans have all the concerns J.R. mentions and one more really big one, language.
Greg, I’m not getting the specific way the difference in miles separating labor markets in Europe and the US somehow undermines the point of the post. Can you spell it out a bit more clearly?
June 5th, 2009 at 9:20 pm
Chris #23: It’s interesting to see a discussion on the Internet that assumes that friends and community are defined by your physical location. Just saying.
Reading and commenting over my computer with anonymous strangers about topics of common interest is certainly fun, but (for most people) it’s hardly a perfect substitute for real-life socializing. I think for most people, if you lack real-world companionship in your current location, you feel lonely.
June 6th, 2009 at 8:00 pm
Seconding nbt @ 27.