The role of spatial GDP spillovers in state-level Okun’s law

Trade and labor mobility linkages in an economic union suggest the possibility of spatial GDP spillovers in empirical models of state-level Okun’s law. We expand and estimate the state-level Okun’s law with spatial GDP spillovers and national output growth. The estimates of state-specific GDP growth effect on state unemployment rate changes drop substantially in the expanded models. State GDP growths that are associated with regional and national GDP growths have much bigger effect on state unemployment rates. The models show a large improvement in the fit of the regressions. The results are primarily driven by employment changes and not by labor force changes. The results support the need for coordination in state-level economic policies. © 2017, Springer-Verlag Berlin Heidelberg.