Wage Expectations in Labor Supply and the Time-Series and Cross-Section Effects of State Unemployment

by Lee A. Lillard

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Examines the effects of local labor market conditions — particularly state unemployment rates — on the wages and employment of prime-aged male workers, by integrating aspects of microeconomic models of career wage determination and labor supply with macroeconomic models of worker expectations in aggregate labor supply. Primary findings are: (1) states differ significantly in both long-run unemployment levels and amplitude of cyclic variability in relation to the national unemployment rate; (2) these differences are related to industrial composition; (3) workers in states with higher long-run unemployment rates earn significantly more than workers in other states; (4) time-series unemployment rate variation in a worker's state coincides with negative effects on hours of work, controlling for worker's own weeks unemployed and workers reporting no unemployment during the eight-year period; and (5) effects differ substantially among subgroups of workers. Therefore, the effects of poor local labor market conditions are more general than the experience of unemployment.

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