The Heterogeneous Effects of Global and National Business Cycles on Employment in US States and Metropolitan Areas*
| Author | Janet Koech,Alexander Chudik,Mark Wynne |
| Published date | 01 April 2021 |
| Date | 01 April 2021 |
| DOI | http://doi.org/10.1111/obes.12402 |
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©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 83, 2 (2021) 0305–9049
doi: 10.1111/obes.12402
The Heterogeneous Effects of Global and National
Business Cycles on Employment in US States and
Metropolitan Areas*
Alexander Chudik,†Janet Koech‡ and Mark Wynne†
†Federal Reserve Bank of Dallas, Dallas, Texas, USA (e-mail: alexander.chudik@dal.frb.
org; e-mail: mark.a.wynne@dal.frb.org)
‡US Department of the Treasury, Washington, D.C., USA (e-mail: janet.koech@treasury.gov)
Abstract
The growth of globalization in recent decades has increased the importance of external
factors as drivers of the business cycle in many countries. Globalization affects countries
not just at the macro level but at the level of states and metro areas as well. This paper
isolates the relative importance of global, national and region-specific shocks as drivers of
the business cycle in individual US states and metro areas. We find about 2/3 and 1/2 of
the employment fluctuations in US states and metro areas, respectively, are explained by
the global and national shocks lumped together. The split between the importance of the
global and national shocks is about 50:50, based on the standard identification scheme in
the literature. Next, we document substantial regional heterogeneity in the sensitivity of
states and metro areas to global shocks, and show that direct trade linkages are not the only
channel through which the global business cycle impacts regional economies. In particular,
indicators of size and industry composition dwarf the explanatory power of trade linkages
in explaining the regional differences.
I. Introduction
This paper is motivated bythree obser vations.First, the US economy has become a lot more
globalized in recent years. One simple metric of the extent of that globalization is the ratio
of the value of imports and exports of goods and services relative to total nominal GDP.
Between 1985 and 2008, that ratio increased from 16.6% to 29.9%. It fell to 24.6% in 2009
JEL Classification numbers: E24, E32, F62, F66
*Wethank the Editor, two anonymous referees,Valerie Grossman and Jay Hyun for helpful comments. Weare also
grateful for helpful comments received from participants in the 93rd Western EconomicAssociation Inter national
meetings, and participants in seminars at the following institutions, where previous versions of this paper were
presented: Australian National University, Banque de France, European Central Bank, Oesterreichische National
Bank, Slovak National Bank, Swiss National Bank, University ofAdelaide, University of Melbourne, and UNSW
Sydney. The views expressed in this paper are those of the authors and do not necessarily reflect those of the US
Treasury, the Federal Reserve Bank of Dallas or the Federal Reserve System. This research was supported in part
through computational resources providedby the Big-TexHigh Performance Computing Group at the Federal Reserve
Bank of Dallas.
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as global trade collapsed during the Global Financial Crisis, but subsequently rebounded
to more than 30% in 2011–14.
Second, globalization occurs not only at the level of the aggregate US economy, but
also in individual states and metropolitan areas. Some states and metro areas are more inte-
grated into the global economy than others, and some states and metro areas have become
more or less integrated into the global economy over time. Exports of goods amounted to
20.6% of Louisiana’s nominal Gross State Product (GSP) in 2016, and 14.5% of Texas’
GSP that same year.At the other extreme, exports of goods accounted for only 1.1% of the
GSP of the District of Columbia, and 1.5% of the GSP of Hawaii. The biggest change in
the importance of exports relative to GSP between 1996 and 2016 was forVermont, where
exports declined from 24.5% of GSP in 1996 to just 9.6% in 2016.
Third, there is considerable heterogeneity in the fluctuations in economic activityacross
US states and metros. While there is considerable co-movementof employment across US
states and metro areas, it is not unusual for some states to be growing while others are
contracting; the same is true at the level of individual metros as well.
One consequence of the greater globalization of the US economy, and of the differential
rates of globalization across individual states and metros, is that the global business cycle
potentially plays a larger role in state and metro employment cycles than in the past. The
question we are interested in is: to what extent are the heterogeneities in the business cycle
across US states and metro areas due to their different susceptibility to aggregate (global
and national) shocks? We document significant differences across states and metro areas in
the share of employment variationthat is attributable to global and national shocks. We then
ask: what characteristics of states and metro areas can account for these differences? For
example, is it the case that states or metro areas that are more dependent on international
trade are more susceptible to external shocks? Or are other characteristics of states and
metro areas more important? We will show that the channels through which global shocks
impact economic activity at the state and metro area levels are more subtle than direct trade
linkages, and specifically, that size and industrial structure seem to matter more than direct
trade linkages via goods exports.1
The remainder of this paper is structured as follows. We review the related literature
in section II, explain the empirical methodology in section III, report the main findings in
section IV and conclude in section V.
II. Related literature
There is a large literature documenting the effects of aggregate or macro shocks on dis-
aggregate or micro entities. In international economics, we are used to thinking about the
drivers of business cycles in small open economies, where the aggregate macro driver
is frequently some measure of global shocks or the global business cycle. In regional
economics, we are used to thinking about how national or sectoral shocks drive business
cycles in regional economies, which may be regionalagg regates of individual states, cities
or metro areas.
1Our analysis focuses on different responses of employment across US states and metro areas. Recent studies in
the literature by Ferraro (2018), Pizzinelli, Theodoridis and Zanetti (2018) and Petrosky-Nadeau and Zhang (2020)
show that the labour market responds differently also over the business cycle.
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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