REGIONAL UNEMPLOYMENT DISPARITIES: AN EVALUATION OF POLICY MEASURES*

Abstract

This paper analyses the efficacy of regional and federal government policies in reducing inter-regional unemployment disparities. We use as our framework a two-region general equilibrium model with a given freely-mobile supply of labour. We assume inter-regional migration to occur in response to inter-regional utility differentials. Each region has households, firms and a regional government. In addition to regional governments, there is a federal government. The firms in a region use a single factor, labour, to produce a single good which we assume to be different to that produced in the other region. It is supplied to households and to the regional government in the form of payroll taxes. Households consume some, trade some with households in the other region and give some up to the federal government as income tax. Firms and households bargain over wages and firms then choose employment to maximise profits. The resulting equilibrium will generally not be a full-employment one. We simulate a linearised numerical version of the model. We examine seven alternative policies, six carried out by a regional government and one by the federal government. In the first group there are traditional tax/expenditure polices as well as policies which might be seen as attacking the natural rate of unemployment: changes in unemployment benefits, changes in union power, changes in the labour force and changes in labour productivity. The federal government policy is a regionally-differentiated fiscal policy. Contrary to expectations, many policies which have traditionally been recommended to alleviate unemployment are found, in fact, to exacerbate the unemployment problem.