The Mystery of Regional Unemployment Differentials: Theoretical and Empirical Explanations

Abstract

Abstract. This paper provides an integrated overview of theoretical and empirical explanations used in the applied literature on regional unemployment differentials. On the basis of 41 empirical studies, four different model types covering nine theoretical constructs of regional unemployment determination and 13 sets of explanatory variables are identified. The overall conclusion is that theoretical and empirical explanations help to reduce the weaknesses in each other. While theory is found to predict that the regional unemployment rate depends on labour supply factors (a collection of factors which affect natural changes in the labour force, labour force participation, migration and commuting), labour demand factors and wage‐setting factors, it is the empirical studies that provide a more profound understanding of the explanatory variables involved. Conversely, whereas most empirical studies provide clear‐cut explanations for the signs of the explanatory variables, it is theory that shows that some of these explanations might be out of proportion. By grouping many studies together, this paper shows that there are indeed clear‐cut trends.

Regional unemployment in the EU before and after the global crisis

“…Empirical investigations on regional unemployment differentials employ a wide range of variables (for a survey, see Elhorst, 2003). Many explanatory variables are negatively correlated with regional unemployment, such as GDP per capita, industry concentration, participation rate, other variables are positively correlated with it, such as the weight of young people on the population or the presence of 'amenities' in the region.…”

Regional labour force participation across the European Union: a time–space recursive modelling approach with endogenous regressors

“…Their theoretical framework assumes that regions produce different bundles of goods and that labour and firms are mobile across regions, and consists of four equations covering short-run labour demand, wage setting, labour supply and long-run effects of labour demand. For reasons of space, a detailed exposition can be referred to in Elhorst (2003). The key labour market variables in their model are participation, wage, unemployment and employment growth rates.…”

“…We control for endogeneity of the unemployment rate since it is simultaneously determined with the participation rate (Fleisher & Rhodes, 1976). Whereas the effect of participation on unemployment should be positive ceteris paribus (if more people supply labour holding labour demand constant, the number of unemployed must increase), most studies have found that a negative effect dominates (Elhorst, 2003).…”

“…Changes in participation rates have been shown to be the main adjustment mechanism to demand shocks in European regional labour markets (Decressin & Fatás, 1995;Gács & Huber, 2005). Furthermore, job growth can encourage more people to enter the labour market (Elhorst, 2003;Partridge, 2001). 4 People may also respond to job opportunities in other regions, which makes employment growth spillovers potentially very relevant too, and here, migration may play an important role (Partridge & Rickman, 2003).…”

“…Labour market indicators show a high degree of heterogeneity across countries, as well as between regions within countries (Elhorst, 2003;OECD, 2011). Another key observation is that regions are not isolated economies due to factor mobility (European Commission, 2014).…”