Regional Mismatch and Unemployment: Theory and Evidence from Italy, 1977-1998
This paper describes the functioning of a two-region economy characterized by asymmetric wage-setting. Labor market tightness in one region (the leading-region) affects wages in the whole economy. IN equilibrium, net labor demand shifts towards the leading region raise unemployment in the rest of the economy and leave regional wages unchanged, causing an increase in aggregate unemployment. This model has some success in explaining the evolution of regional unemployment rates in Italy during the period 1977-1998. Based on SHIW micro data on earnings and ISTAT data on unemployment rates we find strong evidence that wages in Italy only respond to labor market tightness in the North. We estimate that around one third of the increase in aggregate unemployment in Italy can be explained by regional mismatch, mainly due to an excess labor supply growth in the South.
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