Okun’s law and urban spillovers in US unemployment

Abstract

Using data for 2002–2010 from 358 Metropolitan Statistical Areas (MSA), we estimate Okun’s law which accounts for national shocks and spatial spillovers in urban areas. Our scale of measurement is changed to the state level, allowing us to capture a different source of spatial dependence on unemployment. Our main finding is that MSA-specific growth has a small effect on MSA unemployment rate, implying that in a well-integrated labor market like the USA, unemployment at an urban level is highly dependent on neighboring and national labor market conditions. Our results also show that the driving forces behind the behavior of unemployment for MSAs are different than those for states. © 2014, Springer-Verlag Berlin Heidelberg.