There is an old quip about a guy who hears on the local news that most accidents happen within five miles of home. “Darn, I’ve got to move,” he says to himself. Moving wouldn’t solve this guy’s problem, but moving on has generally been an important means of responding to bad news about regional prospects. For the United States, the importance of labor mobility as an adjustment mechanism in the face of adverse regional shocks was shown in a classic paper by Blanchard and Katz (1992). Over 20 years later, how have the Blanchard-Katz findings held up?
Mai Dao, Davide Furceri and I have updated and extended the Blanchard-Katz findings in a new paper. What do we find?
- Labor mobility remains an important adjustment mechanism in the United States. The use of direct migration data and of instrumental variables estimation, however, suggests that the response of mobility is weaker than in the original Blanchard-Katz paper.
- There are larger mobility responses to regional shocks in recessions than in good times. This seems counter-intuitive: is it really worth moving during a recession from a place with 12 percent unemployment to a place with 7 percent unemployment?. We try to understand why this might be the case and suggest that the answer could lie in cyclical variation in the ability to smooth consumption. Using standard tests, we show that the ability to insure consumption against idiosyncratic risk is pro-cyclical, rising in booms while being almost absent in recessions. Hence it appears that the increased migration during recessions comes out of the desperation of people who have run out of other options.
- Some suggestive evidence in support of this view comes from micro data: we show that it is mostly the long-term unemployed and labor market entrants who undertake the bulk of increased migration during recessions. The long-term unemployed tend to experience larger and more persistent income losses and labor market entrants have the least savings to tap into and less collateral to obtain loans. Therefore one would also expect these groups to have the lowest ability to smooth consumption over the downturn.
In an earlier version of the paper we also compared labor mobility in Europe and the US; these findings were summarized by Krugman.