Macroeconomic Shocks and Regional Employment: The Case of Southern California

In this study, we specify a disaggregated vector autoregression model (VAR) to analyze the behavior of employment in three Southern California counties during two different types of aggregate economic downturns. Using this model, we estimate the impact of hypothetical, one-time shocks to macroeconomic variables, on employment levels by county. The two adverse shocks that we examine are a monetary (demand) shock, and an oil price (supply) shock. Our empirical framework allows us to examine, within a single model, the dynamic behavior of employment during these downturns. We provide evidence that even within regional economies in the United States, employment levels respond differentially to macroeconomic shocks. Our model also allows us to examine how the impact of these shocks on total county employment has changed over time. In particular, we find that, over the sample period, total employment across Southern California has become less sensitive to oil price shocks.