COIDINE 2022, UAGM Gurabo Campus

1. The Persistence of Regional Disparities in
Labor Markets: Evidence from Puerto Rico
César R. Sobrino
11th COIDINE - UAGM, Gurabo Campus
02/18/2022
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
02/18/2022 1 / 16

2. Motivation
The neoclassical economic theory (Solow (1956, 1957); Swan
(1956)) suggests that regarding the labor market in free capital
and labor mobility regimes, the differences in unemployment rates
across the countries (regions) of a currency area (country) are
temporary.
Dec. 2021, Puerto Rico, a US territory, had achieved a
pre-pandemic employment growth rate similar to the recovery
trend of the US. Liberty Street Economics, New York Fed
But, from 1976 to 2018
Unemployment rate of PR above 10%
Labor force rate of PR around 45% (that of the US around 65%).
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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3. Motivation
In the short-run, Sobrino & Heath (2013)
The unemployment rates of the US and PR share a
non-synchronized business cycle
The unemployment rate of PR positively (negatively) responds by
0.81% to a one percent increase (decrease) in the US unemployment
rate after one quarter.
The data suggests that PR has never achieved full employment
According to Mundell (1961) & McKinnon (1963), is one of the
benefits of being a currency area member.
The facts mentioned above invite the question of whether
permanent disparities are present in the labor market of Puerto
Rico.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
02/18/2022 3 / 16

4. Goal
The goal of this study is to analyze whether the stochastic convergence
hypothesis (presence of temporary disparities) holds for the regional
labor markets of Puerto Rico.
We focus on whether regional unemployment, employment, and labor
force rates had permanent disparities relative to the US and domestic
counterparts.
We employed six economic areas: central, east, metro, north, south, and
west
The (no) rejection of the stochastic convergence hypothesis means that
the deviations of a regional variable from its counterpart are affected by
a (temporary) permanent shock; in other words, the deviations follow a
(stationary) non-stationary process.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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5. Labor Markets of PR
Unemployment Rate Employment Rate
Labor Force Rate
1990 (X-axis) vs. 2019 (Y-axis)
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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6. Previous Empirical Literature on Currency Areas
Estrada et al. (2013) found that β -convergence for unemployment rates
held for the period 1998–2007 but not for the period 2008–2012.
Dolls et al. (2018) found that β -convergence held for unemployment
rates between 2000 and 2017 and employment rates between 2000 and
2016.
Konya (2019) employed the time series β -convergence, σ -convergence,
and stochastic convergence approaches. Using data from 1991 to 2015,
four subsets of countries were determined. For each group, he found that
the convergence of unemployment rates held.
Kristic et al. (2019) examined the stochastic convergence of
unemployment rates, including structural breaks on the unit root tests.
He discovered that stochastic convergence held for some countries.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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7. Methodology
Bernard and Durlauf (1995) and Bernard and Durlauf (1996). At the
regional level, the interpretation is region i and its national counterpart
converge if the long-run forecast of the log of the processes (regional and
national) is equal to fixed time t
lim
t⇒∞
E(xit − xt/It) = ui
ADF Test, (Null hypothesis: the presence of unit roots in the time series)
KPSS Test (Null hypothesis the process is stationary.)
The stochastic convergence hypothesis will hold if the null
hypothesis of the ADF test is rejected and the null hypothesis of
KPSS test cannot be rejected.
Panel unit roots to gain power in the tests. (for Levin–Lin–Chu and
Im–Pesaran–Shin: the null hypothesis that all the panels contain a unit
root; and Hadri: the null hypothesis that all the panels are (trend)
stationary
Zivot-Andrews Test (Null hypothesis: time series is break non stationary)
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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8. Data
We collect the unemployment rate, employment level, labor force level,
and population for the period 1990:04–2019:12 from the Statistical
Institute of PR for 76 municipalities of Puerto Rico.
Employment and labor force are divided by the working-age population.
The US data was collected from BLS.
We group (by averaging) each time series of each municipality by
following the economic areas (tourism areas) of the island.
The unemployment rate, the employment rate and the labor force rate
are converted in logs. The deviations, which are going to be tested, are
the regional process minus each counterpart, the US and the domestic
ones, respectively. All times series is quarterly, from 1990:Q2 to 2019:Q4,
and seasonally adjusted.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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9. Deviations
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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10. Outcomes: Univariate and Panel Unit Root Tests
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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11. Outcomes: Unit Root Tests including Structural Breaks
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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12. Outcomes
Using ADF and KPSS, we cannot conclude that stochastic convergence
is present,
Panel unit root tests show similar results, regional labor markets of
Puerto Rico show permanent disparities.
Unit root tests including structural breaks indicates that the deviations
are mostly non-stationary for the deviations relative to the US.
However, for the deviations relative to the national counterpart, there
are different levels of persistence.
Specifically, the evidence suggests that the unemployment disparities of
the west area, the employment disparities of the south area, and the
labor force disparities of the south and north areas are permanent.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
02/18/2022 12 / 16

13. Discussion: Permanent Shocks
Federal minimum wage
From 1991 to 2019, youth unemployment rate of PR and the US
around 26% and 12%, respectively
Castillo-Freeman and Freeman (2007) find that the increases in the
federal minimum wage reduces the employment level by eight to ten
percent.
Federal transfers
According to Dietz(2001), two “safety valves” prevented a social
distress: the US federal transfers and the fact that Puerto Ricans
are American citizens
The federal payments may have affected the labor market in two
ways: a) they increased the opportunity cost of finding a job and
did not increase (increased) the labor force rate in the formal
(underground) economy,
The Jones Act
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
02/18/2022 13 / 16

14. Conclusions
With respect to the US, we cannot conclude that stochastic convergence
is present, in other words, the regional disparities in labor markets are
permanent.
The outcomes suggest that the regional labor markets of Puerto Rico are
in a long-term disequilibrium, nevertheless, in the short-run, the
unemployment rates of the US and Puerto Rico share a
non-synchronized business cycle.
Belonging to a currency area is not a sufficient condition for temporary
disparities in regional labor markets.
With respect to PR, the unemployment disparities of the west area, the
employment disparities of the south area, and the labor force disparities
of the south and north areas are permanent.
Further research may address the role of the shocks mentioned above on
the relative unemployment rate, relative employment rate, and relative
labor force rate.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
02/18/2022 14 / 16

15. References
Bernard, A. B. and Durlauf, S. N. (1995). Convergence in international
output. Journal of Applied Econometrics, 10(2):97-108.
Bernard, A. B. and Durlauf, S. N. (1996). Interpreting tests of the
convergence hypothesis. Journal of Econometrics, 71(1-2):161- 173
Castillo-Freeman, A. J. and Freeman, R. B. (2007). 6. when the
minimum wage really bites: The effect of the us-level minimum on
puerto rico. In Immigration and the work force, pages 177-212.
Dietz, J. L. (2001). Puerto rico: The ‘three-legged ‘economy. Integration
and Trade Journal, 5(15):247-273.
Dolls, Mathias and Fuest, Clemens and Krolage, Carla and Neumeier,
Florian and Stöhlker, Daniel(2018). Convergence in the EMU: What and
how? IMF Economic Review
Estrada, Ángel and Galí, Jordi and López-Salido, David(2013). Patterns
of convergence and divergence in the Euro Area. IMF Economic Review,
61(4): 601- 630.
César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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16. References
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Sobrino, C. R. and Heath, E. (2013). Currency area and
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César R. Sobrino (11th COIDINE - UAGM, Gurabo Campus)
The Persistence of Regional Disparities in Labor Markets: Evidenc
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