The Enduring Employment Impact of Your Great Recession Location
Working paper (May 2016). Coverage by the Washington Post and Wall Street Journal.

Abstract2007-2009 employment shocks varied dramatically across U.S. local areas. This paper asks whether Americans were jobless in 2014 because of where they were living in 2007. To separate causal location effects from the effects of nationwide skill-specific shocks, I hold skill type constant by comparing workers who in 2006 earned the same amount from the same retail chain firm, at establishments located in different local areas. I find that conditional on 2006 firm-x-wages fixed effects, living in 2007 in a below-median-shock area caused those workers to be 1.0pp less likely to be employed in 2014. The enduring impact is not explained by enduringly high local unemployment---which has returned to normal across space---nor by reduced migration, higher disability insurance enrollment, or higher layoff rates. Instead, the evidence is consistent either with scarring via costlier layoffs or with persistently low labor demand in severe-shock areas. These within-skill impacts demonstrate limits to U.S. local labor market integration and suggest hysteresis since the great recession: area-level shocks depressing long-term employment via labor force exit, even after unemployment has recovered. 


Graphical introduction: Were Americans jobless in 2014 because of where they were living in 2007, even though unemployment has returned to normal across space?

 



2007-2009 employment contractions varied substantially across the United States. Some places like Phoenix AZ were hit hard while other similar places like San Antonio TX were not...
 



...But unlike the aftermath of the 1980s and 1990s recessions, employment in hard-hit areas remains very depressed relative to the rest of the country. Thus great recession location has enduringly impacted Americans' employment, unless workers were just fundamentally different across space...

 

...To isolate causal effects of 2007 location, I zoom in and compare very similar workers across space: those who in 2006 worked for the same retail firm in different local areas. I find that living in 2007 in a hard-hit area caused workers to be over 1% less likely to be employed in 2014.

I conclude that: 

(1) Living in a hard-hit area has caused enduring joblessness and exacerbated inequality. 

(2) At current recovery speed, employment differences across the United States are estimated to remain abnormal into the 2020s---more than a decade after the great recession. 

(3) Employment models should allow market-wide shocks to cause persistent labor force exit, depressing employment even after unemployment returns to normal---consistent with the great recession continuing to depress U.S. aggregate employment: