Thresholds for Employment and Unemployment - a Spatial Analysis of German Regional Labour Markets 1992-2000

unemployment rate. Second, regional information is considered to a large extent. In
particular, the analysis is carried out using a sample of 180 German regional labour
markets, see Eckey (2001). Since the cross-sections are separated by the flows of job
commuters, they correspond to travel-to-work areas. Labour mobility is high within a
market, but low among the entities. As the sectoral decomposition of economic activi-
ties varies across the regions, the thresholds are founded on a heterogeneous experience,
leading to more reliable estimates.

The contribution to the literature is twofold. First, to the best of our knowledge, no pre-
vious paper has investigated a similar broad regional dataset for the German economy
as a whole before. By using a panel dataset, for each year information on the regional
distributions around the regression lines as well as theirs positional changes is provided.
Second, the methods applied are of new type. They involve a mixture of pooled and
spatial econometric techniques. Dependencies across the regions may result from com-
mon or idiosyncratic (region specific) shocks. In particular, the eigenfunction decompo-
sition approach suggested by Griffith (1996, 2000) is used to identify spatial and non-
spatial components in regression analysis. As the spatial pattern may vary over time,
inference is conducted on the base of a spatial SUR model. Due to this setting, efficient
estimates of the thresholds are obtained.

The rest of the paper is organized as follows. In the next section (section 2), we review
the laws of Verdoorn (1949, 1993) and Okun (1962, 1970), as they mark the corner-
stones of the analysis. Both identify the threshold in terms of some lower bound of out-
put growth. In Verdoorn's law, the growth rate is sufficient for an increase in employ-
ment, while in Okun's law, the focus is on a fall in the unemployment rate. Afterwards,
the econometric methods are discussed (section 3). In section 4, the dataset is described.
The empirical results are presented in section 5. The final part of the paper (section 6)
concludes.

2. Threshold employment and unemployment

The law of Verdoorn (1949, 1993) states that faster output growth (y) will induce gains
in labour productivity growth (p). Formally, the relationship

(2.1) pt =β0+β1yt ,β1 >0

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