Adjustment to Equilibrium Unemployment in Local Labor Markets

Abstract

Unemployment rates for counties or other substate areas tend to be highly correlated with past unemployment rates. They persist over time. This study shows that this persistence is not an indication of a slow adjustment to equilibrium. Rather the persistence exists because the underlying determinants of county unemployment rates change but slowly over time. Because unemployment rates return quickly to their equilibrium values, regional policies aimed at boosting local demand arc unlikely to succeed in reducing unemployment. Supply-side regional policies aimed at reducing equilibrium unemployment rates might have a long-term effect. (J64 and R23)