An SVAR Model of Fluctuations in U.S. Migration Flows and State Labor Market Dynamics

Abstract

1. IntroductionThe high degree of geographic labor mobility is often thought to play a key role in the relative flexibility of the U.S. economy (Evans and McCormick 1994; Decressin and Fatas 1995). Regional mobility in the United States has been reported to be at least 3.5 times greater than that of the United Kingdom (Hughes and McCormick 1994) and two to three times higher than most European Union nations (Obstfeld and Peri 1998). Labor migration can equilibrate regional labor markets exposed to asymmetric demand shocks because employed or jobless individuals in areas that are experiencing a relative (to the national average) economic downturn can migrate to areas that are not as adversely affected, reducing the aggregate unemployment rate (Archibald 1969). The resulting net employment gains increase aggregate output. Thus, if migration flows mainly smooth over asymmetric demand shocks, greater regional labor mobility improves macroeconomic performance and enhances the effectiveness of a currency union or monetary policy (Mundell 1961; Bayoumi and Eichengreen 1993; Obstfeld and Peri 1998).An often-overlooked aspect is there may be shifts in population location unrelated to changing job fortunes, which implies that migration becomes an additional source of labor-market fluctuations. The dramatic modern shift in U.S. population to warmer and amenity-attractive areas in the South and West suggests that migration flows may be key sources of regional economic shocks (Graves 1979; Mueser and Graves 1995; Rappaport 2004). So, if U.S. migration flows are greatly influenced by other factors besides demand shocks, large aggregate migration flows may not be necessarily indicative of a more flexible labor market, and may even work against adjustment to regional demand shocks, which would contrast with prevailing economic wisdom.A related issue is migration's role in affecting economic development policies such as tax breaks, subsidies, educational support, and infrastructure. In assessing the effectiveness of economic development policies that alter labor demand, Bartik (1991, 1993) finds that migration is the primary supply response, but he also reports that demand shocks induce modest permanent changes in local unemployment and labor-force participation rates. To the extent that migrants take the new jobs, economic development policies are less effective in improving economic outcomes of a region's original residents. Conversely, Eberts and Stone (1992) report that increased labor-force participation is the primary supply response to demand shocks, suggesting that original residents benefit more from employment growth. Decressin and Fatas (1995) similarly find that shifts in labor-force participation are the primary short-run supply responses to demand shocks in Europe.In short, not only do migration fluctuations reflect responses to asymmetric regional demand shocks, they also reflect supply-side innovations and affect whether local economic development policies are successful in benefiting original residents. Therefore, this paper utilizes a structural vector autoregression (SVAR) approach to carefully examine the fluctuations in U.S. migration from the 1970s through the 1990s for the lower 48 states. In assessing the proportion of migration fluctuations that are responses to labor demand shocks versus being sources of shocks themselves, a primary goal will be to appraise migration's role in facilitating regional and overall U.S. labor-market flexibility in responding to asymmetric shocks. The results have implications for assessing both the transmission mechanism of macroeconomic policies and the effectiveness of state and local economic development policies. Indeed, one of the more interesting findings is that the underlying determinants of a particular state's migration flows can differ from the underlying causes of its employment growth (e.g., Partridge and Rickman 2003).1The next section discusses the theoretical underpinnings of migration fluctuations. …