Wednesday, August 13, 2008

Higher unemployment or gas prices: Which would you prefer?

The national gas price rose 37% since last year and now sits at $3.86/gallon. The unemployment rate 1% since last year and now is 5.7%. If you had told me last year, when gas prices were $2.82/gallon and the unemployment rate was 4.7%, that prices and the unemployment rate would surge, then I would have been seriously worried for the economy. Transportation bills are 17% of average living costs, and such a surge in energy prices could cripple the economy (could being the operating word since the economy is currently growing at a 1.9% annual rate), especially when spending is falling with rising unemployment.

17% and 5.7% are just national averages. Labor dynamics and gas prices differ across the country. Drivers in New York City likely take public transportation and their transportation bills may be lower than in L.A., where people drive one house over to visit their neighbors (L.A. Story starring Steve Martin). The Midwest’s labor market, where the auto industry is dominant, may be harder hit than in other regions.

The chart shows the pattern of increases in gas prices and unemployment rates for the following regions: Boston, Chicago, Cleveland, New York City, and San Francisco. The data are the 1-year % change in gas prices in each city and the annual change in the unemployment for the Fed’s regional banks.

In June, Chicago has enjoyed the smallest hike in gas prices (16%), while Boston has been subject to the strongest surge in gas prices (29%). Cleveland has enjoyed the smallest rise in unemployment (0.8%), while San Francisco has experienced the biggest jump in unemployment (1.4%).

I would choose higher gas prices over rising unemployment. Drivers can substitute their methods of transportation from the car to a bus, bike (it’s summertime), walking, or taking the train. However, job creation is low (if positive at all), and nationally 463,000 net-jobs have been slashed since January. A rising unemployment rate by definition says that the number of people who want to find a job but can’t is rising; substituting toward new jobs has become more difficult.

Please leave comments. Best, Nontruths

1 comment:

  1. Definitely higher gas prices. Having lived near Chicago and San Francisco, public transportation is readily available to all, even some non-public type in the Bay Area. Casual car pooling is big there. I would absotlutely HATE to be unemployed in SF - talk about high cost of living.