Regional labor demand and national labor market institutions in the EU15

The labor market effects of the recent financial and economic crisis are rather heterogeneous across countries and regions. Such differences in labor market performance among industrialized countries are an issue of ongoing research. The objective of this paper is to analyse labor market disparities among European regions and to provide evidence on the factors behind these differences. Whereas previous research focused on effects of national labor market institutions, we also take structural characteristics of regions into account and investigate differences in labor demand responsiveness and their potential determinants. The data set covers the NUTS2 regions in the EU15 for the period 1980 to 2008. We apply an error correction model that is combined with a spatial modeling approach in order to account for interaction among neighboring labor markets. Our findings point to substantially distinct labor demand responses to changes in output and wages among European countries and regions. Moreover, the rate of adjustment to disequilibrium is subject to a signifcant variation across units of observation. Whereas evidence on the significance of region specific variables as explanatory factors is weak, labor market institutions, especially regulations that affect the determination of wages, explain an important fraction of the disparities.