The Existence and Persistence of Large Spatial Disparities in Unemployment Within National Economies Is a Central Issue in Regional Economics.

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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 2001, the average unemployment rate in the EU was…show more content…
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 hysteresis. Unemployment hysteresis, proposes that cyclical fluctuations will have permanent effects on the level of unemployment due to labour market rigidities. Thus, under this hypothesis – pioneered by Blanchard and Summers (1986) – the level of unemployment is characterised as a non-stationary process.. This means that for a region to exhibit pure hysteresis a negative labour shock will have a permanent negative effect upon its unemployment rate. The flexibility variant of the hysteresis explanation for persistent unemployment

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