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Some unpleasant arithmetics of regional unemployment in the EU. Are there any lessons for EMU?

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Author Info

  • Lucio R. Pench
  • Paolo Sestito
  • Elisabetta Frontini

Abstract

Several studies have documented the weak response of regional wage differentials and labour mobility following region-specific (“idiosyncraticâ€) shocks in the average of the EU countries. This has been often taken as evidence of the rigidity of labour markets in European countries, as opposed to the flexibility of the USA. However, as such shocks by definition average to zero, one cannot make an explicit link between the (lack of) adjustment at regional level and aggregate unemployment. Moreover, the emphasis on the reaction to short-run idiosyncratic shocks is unlikely to explain the permanent differentials across regions, which characterise the regional distribution of unemployment in many EU countries. This paper tries to provide a better understanding of the regional distribution of unemployment and why region-specific shocks can matter for aggregate unemployment. It does so by explicitly considering the possibility of asymmetric reactions, so that unemployment rises more in poorer areas suffering an adverse shock than it declines in richer regions experiencing a favourable shock. The reason behind such asymmetries is the presence of a wage floor in the poorer regions resulting from policy centralisation, as for instance in the case of a national unemployment compensation system, which provides benefits that are uniform across regions. If such a mechanism is at work, aggregate unemployment tends to be “inflated†by region-specific shocks that are inequality- increasing. After presenting an illustrative model of the mechanism, the paper proposes a simple measure of the resulting “excess unemploymentâ€, based on the difference between the average (national) unemployment rate and the unemployment rate of the median region. It also examines the relationship between regional asymmetries in unemployment and the dispersion of productivity across regions, taken as proxy of the inequality-increasing shocks. The evidence, while not entirely conclusive, justifies two tentative policy conclusions, which are particularly relevant in the context of EMU: a) to avoid centralisation of labour market institutions at the EU level that may end up inflating aggregate unemployment; b) to effectively deploy regional policies to combat inequality- increasing shocks.

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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 134.

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Length: 50 pages
Date of creation: Apr 1999
Date of revision:
Handle: RePEc:euf:ecopap:0134

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Related research

Keywords: regional policy; unemployment; disparities;

References

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  1. Maclennan, Duncan & Muellbauer, John & Stephens, Mark, 1999. "Asymmetries in Housing and Financial Market Institutions and EMU," CEPR Discussion Papers 2062, C.E.P.R. Discussion Papers.
  2. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  3. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  4. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, December.
  5. Paolo Mauro & Antonio Spilimbergo, 1998. "How Do the Skilled and the Unskilled Respond to Regional Shocks? the Case of Spain," IMF Working Papers 98/77, International Monetary Fund.
  6. Jimeno, Juan F. & Bentolila, Samuel, 1998. "Regional unemployment persistence (Spain, 1976-1994)," Labour Economics, Elsevier, vol. 5(1), pages 25-51, March.
  7. Brunello, Giorgio & Lupi, Claudio & Ordine, Patrizia, 2000. "Regional Disparities and the Italian NAIRU," Oxford Economic Papers, Oxford University Press, vol. 52(1), pages 146-77, January.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  9. Oswald Andrew J., 1996. "A Conjecture on the Explanation for High Unemployment in the Industrialized Nations : Part I," The Warwick Economics Research Paper Series (TWERPS) 475, University of Warwick, Department of Economics.
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Citations

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Cited by:
  1. Roberto Bande Ramudo & Melchor Fernández Fernández & Víctor Montuenga Gómez, 2011. "Wage flexibility and local labour markets: homogeneity of the wage curve in Spain," Documentos de trabajo - Analise Economica 0044, IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia.
  2. Luminita VOCHITA & George CIOBANU & Andreea CIOBANU, 2008. "Implications of wage bargaining systems on regional differentiation in the European Union," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 2(36), pages 862-873, may.
  3. Jurajda, Stepan & Terrell, Katherine, 2007. "Regional Unemployment and Human Capital in Transition Economies," CEPR Discussion Papers 6569, C.E.P.R. Discussion Papers.
  4. Marelli, Enrico, 1999. "Convergence and asymmetries in the employment dynamics of the European regions," ERSA conference papers ersa99pa120, European Regional Science Association.
  5. Floro Ernesto Caroleo & Gianluigi Coppola, 2005. "The impact of institutions on Regional unemployment disparities," ERSA conference papers ersa05p758, European Regional Science Association.
  6. Athanasios Vamvakidis, 2008. "Regional Wage Differentiation and Wage Bargaining Systems in the EU," IMF Working Papers 08/43, International Monetary Fund.
  7. Floro Ernesto Caroleo & Gianluigi Coppola, 2006. "The Impact of the Institutions on Regional Unemployment Disparities in Europe," Discussion Papers 4_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  8. Peter Huber, 2008. "Regional Labour Market Disparities in an Enlarged European Union," WIFO Working Papers 309, WIFO.
  9. Athanasios Vamvakidis, 2009. "Regional Wage Differentiation and Wage Bargaining Systems in the European Union," Financial Theory and Practice, Institute of Public Finance, vol. 33(1), pages 73-87.
  10. Adalgiso Amendola & Floro Ernesto Caroleo & Gianluigi Coppola, 2003. "Regional differences in the European labour market," ERSA conference papers ersa03p200, European Regional Science Association.
  11. Sarantis LOLOS & Evangelia PAPAPETROU, 2012. "Unemployment disparities and persistence Assessing the evidence from Greek regions, 1981-2008," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 12(1), pages 69-90.
  12. Roberto Basile & Luca De Benedictis, 2004. "Regional Unemployment and Productivity in Europe and the US," ERSA conference papers ersa04p38, European Regional Science Association.
  13. Basile, Roberto & Padoa Schioppa, Fiorella Kostoris, 2002. "Unemployment Dynamics of the 'Mezzogiornos of Europe': Lessons for the Mezzogiorno of Italy," CEPR Discussion Papers 3594, C.E.P.R. Discussion Papers.

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