The Employment and Real Wage Effects of Crude Oil Price Variations: An Econometric Case Study of Houston, Texas

Abstract

In light of the supposed economic diversification that has taken root in Houston, Texas since the great oil bust of the 1980’s, this paper functions to examine the relationship between real crude oil prices and employment and real wages in the Bayou City over the period of 1990-2016. Cochrane-Orcutt regression estimates suggest that there is no evidence that variations in real crude oil prices have any substantial influence on total nonfarm employment throughout the city. However, estimates do imply that a small and positive relationship is present between total real wages earned in the city and crude price changes. At the sector level, significant estimates indicate that four industries in Houston are oil-dependent (mining and logging, manufacturing, wholesale trade, and professional and business services), meaning higher oil prices are associated with employment gains. Conversely, employment in the finance and insurance and the leisure and hospitality industries is negatively related to oil prices. When periods of oil price increases and decreases are separately examined, first-difference regression estimates suggest that an oil price increase has a greater employment impact on the city of Houston than an oil price decrease of the same magnitude. In terms of economic diversification within the period of 1990-2016, regression results propose that during the first half of this interval there was not a significant relationship between oil prices and total employment in Houston. However, from 2004-2016, a significant relationship appears between the two variables. Possible explanations for this occurrence, other than a setback in diversification efforts, include that oil prices have been exceptionally volatile in the latter half of our time period of interest. These recent oil price boom and bust cycles have led to a reemergence of a significant oil price-employment relationship in Houston.