Abstract
During the last recession and its aftermath, aggregate price growth and aggregate nominal wage growth remained robust despite the high rate of unemployment. We document that U.S. states with weaker labor markets experienced lower price growth, lower nominal wage growth, and lower real wage growth during the Great Recession. Given that reliable measures of local prices do not exist, we create our own state price indices using scanner data from the Nielsen Retail Scanner Database. The main innovation of the paper is the development of an econometric procedure that combines cross-region data with aggregate time series data to infer the underlying shocks driving both aggregate and regional business cycles. Applying our procedure to the Great Recession, we find that a combination of both “demand” and “supply” shocks are necessary to account for the joint dynamics of aggregate prices, wages and employment during the 2007-2012 period. In contrast, we find that only demand shocks are needed to explain the cross-region variation. The results suggest that only using cross-region variation to explain aggregate fluctuations is insufficient when shocks do not have a substantive regional component.
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