European regional unemployment: Entry into EMU heightens need to address effectiveness of adjustment mechanisms

• Pages: 181-183

Page 181

IMF SURVEY: Why have you chosen to focus on regional unemployment within countries? MAURO: Regional differences have costs of their own and give us hints as to the underlying reasons why overall unemployment rates are so high. Basically, we looked at this issue for three reasons. First, there is the likelihood that large and persistent regional disparities in unemployment may contribute to a higher national nonaccel-erating inflation rate of unemployment (NAIRU). Inflationary pressures are more likely to arise in the initial stages of a recovery in a country with large differences in its regional unemployment rates. If you have 5 percent unemployment in some regions and 25 percent unemployment in others, inflationary pressures will start rising early in the 5 percent unemployment areas. Inflation will rise more slowly in a country with a geographically uniform unemployment rate of 15 percent.

Second, there are large social costs associated with regional unemployment disparities. When you have 15 percent unemployment throughout a country, it's a situation in which I maybe unemployed but my neighbors, family, and friends are likely to still be working. Imagine, instead, that you have 5 percent unemployment in some regions and 25 percent in others. In regions where the unemployment rate is 25 percent, many more people will be unemployed and families are much less likely to be able to pool their resources.

But third, and the biggest reason why we look at this, is that the persistence of large differences in unemployment rates within a country suggests that something is wrong with the adjustment mechanisms in that economy. If you have large parts of the country with high unemployment rates for a very long time, and people don't migrate out of the high unemployment areas and firms don't move into the high unemployment rate areas either, something is going wrong. PRASAD: We view regional disparities, especially persistent disparities, as a symptom of inappropriate or inefficient labor market adjustment. Aggregate shocks may hit an entire economy, but region- and sector-specific shocks have different effects on different regions and usually cause an adjustment to take place. A large body of literature indicates that in the United States, adjustment occurs through labor migration from a negative shock area to a positive one. Migration of capital is an alternative channel of adjustment.

IMF SURVEY: Your study examines regional unemployment rates in 14 European countries and the United States. Where were the disparities most severe and what do the disparities tell you about the possible reasons for high regional unemployment?

MAURO: Clearly, Italy and Spain stand out as the countries with the largest regional disparities. Italy, in particular, has striking regional differences. In Spain, Andalusia, in the agricultural south, has an unemployment rate of more than 30 percent. In Navarra, unemployment is 10 percent. But Spain has a higher nationwide unemployment rate. What makes Italy so striking is that the lower national unemployment rate...