An important question is how state and local spending responds to changes in the level of overall economic activity such as booms and recessions and changes in state labor market conditions. To some extent, the unemployment variable in the need analysis incorporates the effects of unemployment on state and local spending. In addition, we developed other models that examined the effect of the state unemployment rate alone and in conjunction with other variables, such as per capita personal income, on per capita spending. We expected that any negative effect on spending of increased state unemployment would occur at least in significant part through the reduction in state per capita personal income that occurs when unemployment rises. Our models allowed us to test this hypothesis.
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