in contrast to other European countries, regional disparities in unemployment increase
during economic upturns and decrease during downturns. They argue that this is due to
the differences in the wage setting mechanism of three groups of regions. The existence
of wage imitation effects imposes higher costs on firms in the less dynamic sectors of the
economy. These costs have a greater impact on the less dynamic regions since they have
a higher concentration of lagging industries.
Table 8: Total effects of actual shocks (pp)
|
taxt |
bt |
oilt |
impt |
∆kit | |
|
High Unemployment Regions | |||||
|
1985-1991 |
1.5 |
3.4 |
-7 |
1.9 |
-5 |
|
1992-1995 |
0.2 |
0.5 |
-0.3 |
0 |
5.6 |
|
Low Unemployment Regions | |||||
|
1985-1991 |
2.1 |
0.7 |
-10.9 |
2.4 |
-7.2 |
|
1992-1995 |
1 |
-0.1 |
-1.1 |
-0.3 |
2.6 |
8 Conclusions
In this paper we explained the evolution of regional unemployment rate disparities by
modeling the dynamics of the Spanish labour market. We applied the chain reaction the-
ory (CRT) of unemployment and estimated a standard labour market model consisting
of labour demand, wage setting, and labour supply equations for the Spanish regions.
We grouped the regions into high and low unemployment groups and showed that unem-
ployment disparities depend on regional spillover effects and the degree of regional labour
market flexibility.
In our analysis we first investigated how the degree of labour market flexibility differs
between regions that face the same type and size of shocks.
We then identified the driving forces of regional unemployment rate disparities during
the boom period of 1985-1991 and the recession years of the first half of the 90’s by
measuring (i) the contributions of region-specific and nationwide explanatory variables to
the evolution of unemployment, and (ii) the total effects of actual shocks, i.e. changes in
the explanatory variables that occured in our sample, on the unemployment trajectory.
These two methodologies complement one another since they differ in one main respect.
The "contributions" measure reflects the unemployment impact of the changes in an
exogenous variable in the presence of all other shocks, whereas the "total effects" measure
captures the impact of the changes in an exogenous variable in the absence of all other
shocks.
Our findings can be summarised as follows. First, it takes several years before one-off
shocks are completely absorbed by the labour market. In particular, 20% of the initial
impact of the shock is still felt by the market after approximately two years (labour
demand shock), five years (wage shock), and three years (labour supply shock). Both the
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