Before revision:  In regressions studying the effect of randomly generated placebo sectoral shocks on actual labor market outcomes in U.S. commuting zones, we find that a 5 \% level significance test based on standard errors clustered at the state level rejects the null of no effect in up to 45 \% of the placebo interventions. We derive novel confidence intervals that correctly account for the potential correlation in the regression residuals  .
After revision:  In regressions studying the effect of randomly generated placebo sectoral shocks on actual labor market outcomes in U.S. commuting zones, we find that a 5 \% level significance test based on standard errors clustered at the state level rejects the null of no effect in up to 45 \% of the placebo samples. We use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares, independently of their geographic location. We derive novel inference methods that are valid under arbitrary cross-regional correlation in the regression residuals .