Current thought suggests that increasing oil prices, and subsequently high gas prices, have a large and negative impact on economic growth. Increasing oil prices, as the story goes, divert a larger and larger share of consumer spending toward energy expenditures, decreasing the share available for other purchases, and the breadth of this spending diversion is sizable enough to stall output growth.
However, according to new research, the significance attributed to oil-price shocks is really based on anecdotal evidence from the 1970s, a time when supply was severely constrained by political factors and the economic conditions faced were far different from today’s economic realities. Since the 1970s, oil-price shocks have become less of a burden on the overall economy. In a 2007 NBER working paper,1 authors Olivier Blanchard and Jordi Gali use a variety of econometric tools to evaluate the impact of oil prices on national variables: real GDP, employment, and inflation, to name a few. Their conclusions follow two paths. First, oil-price shocks can only fuel the flames of concurrent economic stress, rather than being the sole driver of economic slowdown. Second, the negative impact of oil-price shocks has lessened over the past 30 years. They point to changes in monetary policy since 1980 (a stronger inflation-fighting stance), more flexible labor markets, and a declining share of oil in the economy as an explanation.
Given the limited amount of data available at the state level, I cannot replicate the entire Blanchard and Gali (2007) study. In this note, I adopt only one of their methodologies; this methodology, which is described in section four of their paper, is critical to their second claim that oil-price shocks have lessened over the past 30 years. I focus on two variables: real wages and salaries and total employment in each of the three states. The results are visual in nature and are suggestive of Blanchard and Gali’s national results. However, for the three states, there are key differences in the relationships between oil prices and the state-level variables.
- State employment and real wages for our region are far more sensitive to oil-price shocks than the national variables.
- The relationships between oil-price shocks and three-state variables remained highly negative well into the 1990s, whereas the national relationship as a whole gradually improved from the mid-1980s on.