Economic diversity, unemployment and the Great Recession

We revisit the relationship between economic diversity and unemployment in light of the economic shock of the Great Recession. Using U.S. county data we test the overall effect of increased industrial diversity on county level unemployment. Allowing for structured spatial spillovers across counties we find evidence supporting the notion that economic diversity within a given county is associated with lower levels of unemployment across all years of this analysis (2007-2014), while the diversity of neighboring counties was only associated with decreased unemployment at the height of the Great Recession. This spatial spillover effect was responsible for turning the overall marginal effect of diversity on unemployment significant for the period representing the height of the Great Recession and the early recovery period (2009-2011). These results suggest that it is the economic diversity of one's neighbors that provides an unemployment buffer in times of economic downturns. This spatial spillover effect represents a novel finding and it is hypothesized that diversity of one's neighbors plays an important role in assisting in the search for employment in response to an economic shock.