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

"high (low) unemployment regions".¹⁹ Table 1 lists the regions in each of the two groups
and Figure 1 plots the unemployment rates of each group.

a. Unemployment Rates

High and Low unemployment regions. 1980-1995

Figure 1

b. Relative Unemployment Rates
High and Low unemployment regions. 1980-1995

Each panel of regions is modeled along the lines of the structural system (14). Notwith-
standing, our model does not allow for any labour or firm mobility between the high and
low unemployment groups of regions. This is in line with the results for Europe by De-
cressin and Fatas (1995) but is in contrast to the findings of Blanchard and Katz (1992)
who assume perfect mobility of workers and firms between regions, and find that this
assumption is valid for the behaviour of US workers and firms.

The absence of labour mobility between the two panels of regions can be justified on
the following grounds. First, wage differentials may not be sufficiently large to induce
¹⁹ This grouping of the Spanish regions is supported by a distribution dynamics analysis, as suggested
by Quah (1997) and Overman and Puga (2002). Results are available upon request.

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