MIND THE GAP: UNEMPLOYMENT IN THE NEW EU REGIONS

Abstract

Abstract The paper surveys the theoretical and empirical literature on regional unemployment during transition in Central and Eastern Europe. The focus is on optimal speed of transition (OST) models and on comparison of them with the neo‐classical tradition. In the typical neo‐classical models, spatial differences essentially arise as a consequence of supply side constraints and institutional rigidities. Slow‐growth, high‐unemployment regions are those with backward economic structures and constraints on factors mobility contribute to making differences persistent. However, such explanations leave the question unanswered of how unemployment differences arise in the first place. Economic transition provides an excellent testing ground to answer this question. Pre‐figuring an empirical law, the OST literature finds that the high degree of labour turnover of high unemployment regions is associated with a high rate of industrial restructuring and, consequently, that low unemployment may be achieved by implementing transition more gradually. Moreover, international trade, foreign direct investment and various agglomeration factors help explain the success of capital cities compared to peripheral towns and rural areas in achieving low unemployment. The evidence of the empirical literature on supply side factors suggests that wage flexibility in Central and Eastern Europe is not lower than in other EU countries, while labour mobility seems to reinforce rather than change the spatial pattern of unemployment.