Most people in the United States live in a metropolitan area. There are over 300 to choose from and over 80% of the population lives in one. Each metro area, whether it is Detroit, Los Angeles, Miami, Boston or NYC, represents a distinct collection of industries. So, New York City has a larger share of finance jobs than the average metro area while Detroit has more car jobs. The fortune of such cities rises and falls with the "health" of these industries. When finance booms, NYC booms. When the domestic car industry suffers, Detroit suffers.
If you live in a city that experiences such a "bad local demand shock", you can get up and move to another city. Such migration protects you and your family from protracted unemployment. A prominent paper by Blanchard and Katz (called "Regional Evolutions" for Google fans) found that it takes roughly 7 years for a city to recover from a bad demand shock. During the adjustment period, people stop moving in and incumbents move out. This net out-migration leads to adjustment in the labor market so that wages after the shock return to what they were before the shock.
Today, the Christian Science Monitor reports that migration has been chilled. People are not leaving declining areas the way that regional economics predicts. Why Not?
1. Demographics --- the population is getting older and older people don't move to arbitrage labor market opportunities. The expected benefits just don't cover the costs of getting up and going.
2. The unemployment in declining markets believe that their city will soon make a comeback.
3. The unemployed anticipate Federal government will step in and help jump start their city.
4. The unemployed do not believe that other cities offer significantly better opportunities (so in terms of correlations, this would occur if all local labor markets are positively correlated). --- when Detroit is suffering, so is Boston, LA, San Diego.
5. The unemployed are home owners and are under-water and would have to sell their home at a loss if they move.
6. The unemployed are home owners with school age kids who do not want to lose their social capital by moving to a city where they don't know anyone.
This fact has serious consequences for the nation's unemployment rate and hence for the fall 2010 election! If unemployed workers are not leaving "bad" local labor markets, then the national unemployment rate will remain high for longer than in a counter-factual setting in which the unemployed sought out booming local labor markets.
If the Obama Administration wants lower unemployment then it should encourage more households to move to booming South Dakota. As I argue in Climatopolis, climate change will encourage more households to move closer to the Canadian border. Perhaps, Larry Summers urged the President to devote little effort to carbon cap and trade to accelerate global warming and this would nudge households to move to booming South Dakota and this would reduce the national unemployment rate. He is a smart man and he is likely to have foreseen this slightly wild logic chain.
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