U.S. Regional Business Cycles and the Natural Rate of Unemployment

Estimates of the natural rate of unemployment are important in many macroeconomic models used by economists and policy advisors. This paper shows how such estimates might benefit from closer attention to regional developments. Regional business cycles do not move in lock-step, and greater dispersion among regions can affect estimates of the natural rate of unemployment. There is microeconomic evidence that employers are more reluctant to cut wages than they are to raise them. Accordingly, the relationship between wage inflation and vacancies is convex: An increase in vacancies raises wage inflation at an increasing rate. The authors' empirical results are consistent with this and indicate that if all else had remained constant, the reduction in the dispersion of regional unemployment rates between 1982 and 2000 would have meant a two-percentage-point drop in the natural rate of aggregate unemployment.