The Mystery of Regional Unemployment Differentials : Theoretical and Empirical Explanations

This paper provides an integrated overview of theoretical and empirical explanations used in the applied literature on regional unemployment differentials. On the basis of 41 empirical studies, four different model types covering nine theoretical constructs of regional unemployment determination and 13 sets of explanatory variables are identified. The overall conclusion is that theoretical and empirical explanations help to reduce the weaknesses in each other. While theory is found to predict that the regional unemployment rate depends on labour supply factors (a collection of factors which affect natural changes in the labour force, labour force participation, migration and commuting), labour demand factors and wage-setting factors, it is the empirical studies that provide a more profound understanding of the explanatory variables involved. Conversely, whereas most empirical studies provide clear-cut explanations for the signs of the explanatory variables, it is theory that shows that some of these explanations might be out of proportion. By grouping many studies together, this paper shows that there are indeed clear-cut trends