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The Aggregate Implications of Regional Business Cycles

Figure 1 illustrates how a decline in labor demand would normally drive down wages along with employment. If employers are demanding fewer workers, and if the supply of workers remains the same, then employers could expect to offer lower wages to meet their labor needs. Two shocks occurred during the Great Recession to shift that balance: not only a decline in labor demand but also a drop in labor supply. Figure 2 shows how a decline in labor demand, coupled with a drop in supply, could result in less employment while wages remain relatively steady, or sticky.