From Martin Beraja, Erik Hurst and Juan Ospina:
In this paper, we examine the evolution of prices, wages, employment and output across U.S. states during the Great Recession. To do so, we use over 76 billion price observations from the Nielsen Retail Scanner Database between 2006 and 2011 to construct state speciÖc price indices. We document that local retail prices, controlling for good and store Öxed e§ects, varies with local economic conditions. In particular, we Önd that a one percentage point increase in the unemployment rate between 2007 and 2010 was associated with a 0.4 percentage point lower price growth during the same period. Nominal wages also responded di§erentially across U.S. states during the 2007-2010 period. A 1 percentage point increase in the unemployment rate was associated with a 1.2 percentage point lower nominal wage growth during the same period. However, we conclude that failure to account for the di§erential local ináation rates leads one to overstate the variation in real wage growth across U.S. states during the recession. We conclude by constructing a multi-region New Keynesian model with both price and wage rigidity. Using the regional variations in prices and wages, we estimate the relative importance of price and wage stickiness as a nominal rigidity in explaining the regional di§erences in employment.