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

response is equal to the size of the shock, i.e. R0 = 1. We can also refer to the initial
response as the short-run elasticity.

Table 7 below gives the persistence statistics for both the high and low unemployment
groups of regions. Since the differences between the impulse response trajectories of the
high and low unemployment groups are small for the labour demand shock, the table
focuses on wage and labour supply shocks only.

Table 7: Persistence of shocks

Both the real wage and labour supply shocks are far more persistent in the high
unemployment regions than in the low unemployment regions.

Following a labour supply shock, the overall future increase in unemployment is 1.78
percentage points for the high unemployment group - almost double the increase in the
low unemployment regions. Nevertheless, the short-run elasticities are similar - in both
the high and low regions unemployment increases by one percentage point.

Following a shock in wage setting, the short-run elasticity is four-times larger in the
high unemployment regions than in low unemployment regions. The persistence generated
in the high unemployment regions also exceeds that of the low unemployment regions. As
a result, the total increase in unemployment is 1.6 percentage points - almost double the
increase in the low unemployment regions.

6 Contributions of the Exogenous Variables

It is clear from Figure 1a that the evolution of the unemployment rate is characterised
by two turning points: while it is increasing prior to 1985 and after 1991, it is decreasing
between 1985 and 1991.³⁷ Consequently, we are interested in measuring how each of the

³⁷ Specifically, in the low (high) group of regions, the unemployment rate reaches a peak value of 23%
(24%) in 1985, it then gradually goes down to 12% (21%) by 1991, and then starts increasing to end up
at 21% (29%) in 1995.

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