| Abstract: | A portfolio model of employment predicts that cities with more diversified employment opportunities should experience lower unemployment rates than less diversified cities. Empirical analysis of the diversity-unemployment relationship using Census data support the portfolio theory for the years 1950,1960, and 1970. During the early months of the Great Depression, however, industrially more diversified cities experienced higher, rather than lower, rates of unemployment. By combining the portfolio model of employment with the Lucas-Phelps islands model, the anomalous effect of diversity in 1931 is explained as the result of employers' difficulty of distinguishing real from nominal shocks. |
