Uncertainty and the Geography of the Great Recession
July 16, 2015
Daniel Shoag and Stan Veuger of Harvard University document the link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession. The cross-sectional variation in uncertainty robustly matches the distribution of employment outcomes during this period. They find evidence for a causal role for uncertainty in increasing unemployment.
- Results suggest that if uncertainty levels in all states had been at those of the five states facing the lowest levels of uncertainty in 2009, there may have been a national unemployment rate that was about 1.4 percentage points lower.
- The supported model predicts that uncertainty shocks are most likely to reduce employment in high turnover industries, in occupations with larger adjustment costs, and in the youth population.
- Large levels of uncertainty in a state tend to cause a larger range of effects across different industries.
A simple model of hiring and firing under uncertainty rationalizes these results, and the within-state distribution of effects across industries, occupations, and individuals is consistent with this model's predictions. Together, these results suggest that increased uncertainty contributed to the severity of the Great Recession.
Source: Daniel Shoag and Stan Veuger, "Uncertainty and the Geography of the Great Recession," Harvard Kennedy School, March 2015.
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