The Existence And Persistence Of Large Spatial Disparities In Unemployment Within National Economies Is A Central Issue In Regional Economics

2097 words - 9 pages

The existence and persistence of large spatial disparities in
unemployment within national economies is a central issue in regional
economics. Explanations that exist within the literature for why
regional unemployment disparities have been so much more persistent
over time in the EU than in the US can be broadly separated to the
hysteresis and equilibrium arguments. Before illustrating the
analysis and strength of these arguments it is important to ascertain
the scale of persistent unemployment disparities across EU regions and
U.S states, and why this may be a cause for concern.

Regional disparities in unemployment rates are dramatically
significant in Europe. In ...view middle of the document...

Significant persistent disparities in regional unemployment rates can
have numerous problems. It entails considerable differences in the
economic and social exclusion associated with joblessness. Research
conducted within this field in England and Wales demonstrates how high
unemployment is correlated with poor performance on a range of
socio-economic variables. Localities with the highest unemployment
rates also have the ‘highest proportion of lone parent families, the
highest truancy rates and the highest proportion of pupils eligible
for free school meals, which is an indication of poverty.’[4]
Furthermore Oswald (1997) reports survey evidence that shows
unemployed people are much less happy people then the employed and
‘support the conclusion that losing one's job is amongst the worst
things that can happen to a person.’[5] Regional unemployment
disparities specifically break down informal support networks and
asset prices drop sharply with economic distress becoming an acute
social problem. Areas with persistent levels of high unemployment
appear strongly associated with a large shadow economy. For instance,
in Italy the employment in the informal sectors is estimated to be
about 30% in the south and less than 10% in the North.[6] This
relationship indicates high regional unemployment could reflect, and
even to some degree cause, wider governance problems. All these
problems outline the importance regional unemployment and also how
there could be inefficiency in labour and capital markets since
resources that are in excess supply in some regions are not
productively used in others.

A theoretical framework (that encompasses different explanations) for
analysing why regional unemployment disparities tend to be more
persistent within the EU than within the US The framework is a
demand-supply framework with the feature of a labour market that does
not clear due to the ‘imperfect’ nature of the wage bargaining
process. Within this framework, a region has an equilibrium rate of
unemployment that is decreasing with the amount of labour demand,
which is itself positively related to the level of demand for a
region’s output and the efficiency with which a region is able to
combine capital and labour to produce output. This framework allows us
to analyse the impact of labour market shocks, namely labour demand
shocks as they are much more frequent. Ceteris paribus, a negative
labour demand shock causes a region’s rate of unemployment to
increase, which is involuntary. Mechanisms that deal with such
negative shocks so unemployment returns to its equilibrium level
include the real wage flexibility mechanism and the out-migration
mechanism. There are more mechanisms but these two seem to be
empirically easier to analyse and are the most significant. Should
none of these mechanisms operate then a region is said to exhibit pure


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