Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain (1980-1995)

provided by Research Papers in Economics

Labour Market Flexibility and Regional

Unemployment Rate Dynamics: Spain 1980-1995

Universtity of Santiago
and IDEGA⁺

June 2006

Abstract

This paper aims to shed light in the dynamics of Spanish regional unemployment
rates and determine the driving forces of their disparities. The Spanish economy
has one of the highest unemployment rates in the EU and is characterised by severe
regional disparities. We apply the chain reaction theory of unemployment accord-
ing to which the evolution of unemployment is driven by the interplay of lagged
adjustment processes and the spillover effects within the labour market system.
Our model includes nationwide as well as region-specific variables, and takes into
account the limited labour and firm mobility in Spain. We show that the degree of
labour market flexibility differs between high and low unemployment regions, and
find that investment has a ma jor influence on the unemployment trajectory. In ad-
dition, we find that in bad times high unemployment regions are hit more severely
than low unemployment regions, while in good times high unemployment regions
do not benefit as much as low unemployment regions.

Keywords: regional disparities, unemployment, spillover effects, labour market
lagged adjustment processes.

JEL Classifications: R23, J64

* Comments from the GAME research group members are acknowleged. All errors are our own re-
sponsibility.

⅛oberto Bande acknowledges financial support from Xunta de Galicia, through project
PGIDIT05PXIA24201PR.

^University of Santiago and IDEGA, Facultad de Ciencias Economicas y Empresariales, Avenida do
Burgo s/n, 15782 Santiago de Compostela, A Coruna (Spain); tel.: +34 981 563 100 ext. 11666; fax:
+34 981 547134; e-mail: [email protected]

^§ Department of Economics, Queen Mary, University of London, Mile End Road, London E1 4NS, UK;
tel.: +44 020 7882-5090; email: [email protected]

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