Impact of energy prices on unemployment in U.S. states: A dynamic panel analysis

Many studies find that changes in energy prices (especially oil prices) appear to have a significant effect on economic activities (Hamilton, 2003, 2011; Lippi and Nobili, 2009). Within the existing literature examining the link between energy price movements and economic activity, there is a common perception that increases in the price of energy have negative consequences for the US economy. However, very little of the existing work uses state-level data. Using data for the period 1978-2013, a dynamic panel model is used to examine the relationship between energy prices and unemployment among US states. Energy price data is obtained from the U.S. Energy Information Administration for every state. Unemployment rates for each state are from the U.S. Bureau of Economic Analysis (BEA). Consumer Price Index (CPI) data from the BEA is used to correct for inflation.

Using this simple approach, we find a negative relationship, suggesting that labor and energy behave more like substitutes than complements and therefore states with higher relative energy prices will experience lower rates of unemployment, contradicting many studies in existing literature.

Our study differs from the existing literature in two main ways: First, instead of focusing on crude oil prices, we utilize the comprehensive total energy price series. It is the common perception that the fluctuations in energy prices since the 1970s has been driven by disturbances in crude oil markets. However, the share of energy consumption based on petroleum products has drastically decreased over the last few decades, especially in the commercial sector. Second, our data set covers all U.S. states, which allowed us to explore its panel features. Given that the macroeconomics and policy environment are somewhat similar across U.S. states (as opposed to between countries), this allows us to focus on the relationship between energy prices and labor market.