Unemployment is local

Unemployment numbers get a lot of media attention, and for good reason. Wanting a job but not having one is stressful and a source of financial hardship at the individual level. More broadly, unemployment is an indicator of the economy’s health: Are employers creating jobs? Are the skills of job seekers a match for the skills that employers are looking for?

In the U.S., the unemployment news has been relatively rosy. After spiking during the early days of the COVID-19 pandemic, the unemployment rate fell below 4 percent for 25 months in a row, the longest stretch since 1970. In September, it was a little higher, at 4.1 percent.

But, as is often the case, national averages hide local differences. The unemployment rate in Bakersfield, California, was 7.7 percent in September. In Portland, Maine, it was 2.3 percent. And local unemployment rates don’t always move in the same direction: Some are up from a year ago, some are down.

In the Institute working paper “The Geography of Job Creation and Job Destruction,” economists Moritz Kuhn, Iourii Manovskii, and Xincheng Qiu look closely at how unemployment, job openings, and other labor market characteristics vary across locations. For most people, job searches take place within a local labor market—jobs within 10 or 30 or 50 miles from home. Differences in local unemployment rates are “important contributors to inequality,” the economists write, and areas with poor economic performance have been the target of billions of dollars of public money. For example, the federal government’s Empowerment Zone, Enterprise Community, and Renewal Community initiatives were intended to boost local employment and economic growth.

But is such local variation a problem in need of a solution, or is it an equilibrium outcome—the result when the incentives that employers and job seekers face are balanced?

To better understand why unemployment varies across localities, the economists investigate three patterns in local labor market characteristics and how they relate to local unemployment rates.

1. There are large and persistent differences in unemployment rates across local labor markets.

Figure 1 shows that places with low unemployment in 2000 were typically the same places with low unemployment in 2019, and places with high unemployment in 2000 still had high unemployment in 2019. Despite all the changes to the U.S. economy over these 19 years—a period of strong economic growth followed by the Great Recession—unemployment rates in local labor markets ended up very close to where they started.

2. In places with lower unemployment, workers separate from jobs less often and find jobs faster.

In the local labor markets with low unemployment, workers lose their jobs less often than in local labor markets with high unemployment (left panel of Figure 2). Such low separation rates are usually a sign that these are “good” jobs—they are offered by productive employers, who on average lay off employees less often than less productive employers. Workers also find jobs more quickly in locations where unemployment is low (right panel of Figure 2).

Unemployment can therefore differ across places because of differences in the share of workers finding jobs each month or the share of workers losing jobs each month. In the data, the separation rate is twice as high in the city with the highest unemployment than the city with the lowest unemployment, whereas the job-finding rate declines by only one-third. That means the difference in unemployment rates across space is mainly a result of fewer people losing their jobs, rather than a higher probability of finding jobs.

3. Labor markets with lower unemployment have more open jobs per unemployed worker.

The previous figure looked at how local unemployment rates vary with characteristics of the labor market that workers care about—the likelihood of losing or finding a job. Of course, employers care about labor market conditions, too. So the economists look at the ratio of job openings to unemployed workers, what economists call “labor market tightness.” When there are more open jobs relative to people looking for work, it should be easier for searching workers to find a job. But from an employer’s perspective, this means there is a lot of competition to find workers and it will become harder to fill an open position.

What makes a market good for employers, then? Higher unemployment (more people looking for work) plus a loose labor market (large number of unemployed workers per job opening). In these conditions, it will be easy to fill a job because there are many searching workers, but finding a job becomes harder.

If local labor markets differ in both labor market tightness and unemployment rate, as Figure 3 shows, why then do employers create jobs in places with low unemployment, where they face high competition and it will be harder to hire? Why don’t they add jobs in labor markets where more people are actively looking for work?

The answer, the economists suggest, is that some locations are more productive than others. This could be because of differences in local demand, differences in local industry structure, or differences in the natural landscape or climate conditions. Because profits per worker are higher when employers are more productive, employers are motivated to open vacancies in productive markets, leading to good labor market opportunities for searching workers and high job-finding rates. But these highly productive locations also have higher costs of living (such as Seattle, San Francisco, or Boston), which is why unemployed people don’t simply flock there.

The outcome of these forces is that some locations will have high productivity, low unemployment, and high cost of living. Others will have lower productivity, higher unemployment, and lower cost of living. These are equilibrium outcomes, the economists say, the result of a balance of economic forces that play out in different places. As a result, public policy is likely unable to meaningfully change these outcomes and might not need to, as the costs and benefits balance each other out. Instead, the economists suggest, it will be more fruitful to identify outliers—locations that don’t follow these patterns—and then look to see what policies or conditions might be the cause.