provided by Research Papers in Economics
Thresholds for Employment and Unemployment.
A Spatial Analysis of German Regional Labour Markets 1992-2000
Reinhold Kosfeld* and Christian Dreger**
Abstract. This paper investigates the laws of Verdoorn and Okun in order to determine
thresholds for employment and unemployment in all Germany for the period 1992-
2000. Disaggregated datasets for 180 German functional regions provide the basis for
obtaining efficient estimates and spatial labour market characteristics. To capture cross-
section dependencies, a spatial SUR model is built up utilizing the eigenfunction de-
composition approach suggested by Griffith (1996, 2000). The results indicate that
minimum output growth sufficient for a rise in employment is below the level needed
for a simultaneous drop in the unemployment rate. If spatial effects are not controlled
for, the thresholds seem to be markedly overrated.
Keywords: Threshold employment and unemployment, regional labour markets, spatial
filtering techniques, spatial SUR analysis
JEL: C21, C23, E24, E32
1. Introduction
Changes in production and employment are closely related over the course of the busi-
ness cycle. However, as exemplified by the laws of Verdoorn (1949, 1993) and Okun
(1962, 1970), thresholds seem to be present in the relationship. Due to capacity reserves
of the firms, output growth must exceed certain levels for the creation of new jobs or a
fall in the unemployment rate. In order to assess the future development of employment
and unemployment, these thresholds have to be taken into account. They serve as im-
portant guidelines for policymakers.
In contrast to previous studies, we present joint estimates for both the employment and
unemployment threshold. Due to demographic patterns and institutional settings on the
labour market, the two thresholds can differ, implying that minimum output growth
needed for a rise in employment may not be sufficient for a simultaneous drop in the
*
University of Kassel, Department of Economics, Nora-Platiel-Str. 5, 34127 Kassel, Germany. Phone:
+49-561-8043084, E-Mail: [email protected].
Institute for Economic Research Halle (IWH), Kleine Markerstr. 8, 06108 Halle, Germany. Phone:
+49-345-7753854, E-Mail: [email protected].