An Empirical Analysis of Natural and Cyclical Unemployment at the Provincial Level in Spain

Abstract

Differences in regional unemployment rates, as well as their formation mechanism and persistence, have given rise to many papers in recent decades. The present work contributes to this strand of literature from two different perspectives. In the first part of our work, we follow the methodological proposal put forward by Hofler and Murphy (1989) and Aysun et al. (2014). We use a stochastic cost frontier to break down actual Spanish provincial unemployment (NUTS-3) into two different estimation components: the first associated with aggregate supply side factors, and the other more related to aggregate demand side factors. The second part of our research analyses the existence of spatial dependence patterns among Spanish provinces in actual unemployment and in the two above-mentioned components. The decomposition carried out in the first part of our research tells us what margin policymakers have when dealing with unemployment reductions by means of aggregate supply and aggregate demand policies. Finally, spatial analysis of unemployment rates in Spanish provinces may also have significant implications from the standpoint of economic policy since we find common formation patterns or clusters of unemployment.