How do the skilled and the unskilled respond to regional shocks? The case of Spain.

When workers in a given region lose their jobs; do they remain unemployed, drop out of the labor force, or migrate? In other words, what are the mechanisms of adjustment to local labor demand shocks? Existing studies, beginning with the seminal paper by Blanchard and Katz (1992) on the 50 U.S. states, and including those by Decressin and Fatas (1995) on the regions of Europe and by Obstfeld and Peri (1998) on the regions of a wide range of industrial countries, have addressed that question with respect to the labor force as a whole. However, owing in part to data limitations, none of those studies has examined whether the relative speed and strength of these adjustment mechanisms depend on workers' educational levels. To fill that gap, this paper analyzes the dynamic responses to regional labor demand shocks in Spain, considering separately various educational groups.

There are good reasons to expect that workers with different educational levels will respond in different ways to regional labor demand shocks. In fact, the opportunity cost of not working is typically higher for the highly skilled.(1) Therefore, in response to a job loss motivated by a collapse in local labor demand, the highly skilled are more likely than low-skilled workers to migrate rather than remaining unemployed or dropping out of the labor force. It is also important to recognize that the adjustment mechanisms to labor demand shocks by workers of different educational levels depend on existing labor market institutions and policies. This can be seen by considering two extreme hypothetical cases: in the presence of very generous unemployment compensation, migration might be an unattractive option for low-skilled workers, though perhaps still not for the highly skilled; by contrast, in the presence of low unemployment compensation, both low-skilled and highly skilled workers might have similarly strong incentives to migrate.

This paper focuses on the case of Spain. It uses a data set on employment, labor force, and working-age population by educational level for the 50 provinces of Spain over 1964-92. That data set, published by the Instituto Valenciano de Investigaciones Economicas, is almost unique in that similar data are not easily available for any other countries. Beyond the advantage of data availability, however, the case of Spain is extremely interesting in itself. Not only does Spain have the highest unemployment rate (19 percent in mid-1998) among industrial countries, but it also displays large and persistent unemployment rate differences among its regions. By analyzing how workers with different educational levels respond to regional labor demand shocks, this paper considers those issues from a new angle. It also forms part of a broader research agenda on the regional dimension of unemployment in Europe. Related studies, which focus on the persistence of regional unemployment differences and provide further institutional detail, are presented in Mauro, Prasad, and Spilimbergo (1999).

By analyzing the response of workers with different skill levels to regional shocks against the background of Spain's institutions and policies, this paper may lead to useful policy lessons for Spain, but hopefully some of these lessons may be applicable to other countries as well. At the same time, the paper implies that caution must be exercised in drawing conclusions from studies (such as those by Decressin and Fatas, 1995, and Obstfeld and Peri, 1998) that attribute cross-country differences in the dynamics of adjustment to differences in policies and institutions. In fact, by showing that the adjustment to local labor demand shocks depends on workers' educational levels, this paper suggests that future comparative work should also take into account cross-country differences in the educational composition of the labor force.

I. Persistence of Geographic Differences in Unemployment Rates, by Skill Level

Although this paper's main contribution is to estimate how the skilled and the unskilled respond to regional shocks - an exercise that has not been conducted before for any other country - a brief description of the geographic distribution of unemployment in Spain may be useful, particularly because the Spanish case is interesting in itself. This section shows that Spain is characterized by large and persistent geographic differences in unemployment rates, and that the degree of persistence is higher for low-skilled than for highly skilled workers. Therefore, in the Spanish setting, efforts to reduce geographic unemployment imbalances may need to focus on low-skilled workers.

There is a striking variation of unemployment rates among Spain's 17 regions, ranging from about 11 percent in the Balearic Islands to 30 percent in Andalucia in mid-1998. Considering a finer level of geographical disaggregation, namely that of the 50 provinces (provinces are subsets of regions), unemployment rates vary even more widely, ranging from 8 percent in Lleida, Cataluna, to 38 percent in Cadiz, Andalucia. Although patterns in the geographic distribution of unemployment rates are not easy to identify, a broad generalization could be that the southern, agricultural regions, such as Andalucia and Extremadura, and some of the northern regions with declining industries, such as Pais Vasco, Cantabria, and Asturias, tend to have higher unemployment. In addition to the large differences among regions, there is also substantial variation in unemployment rates among provinces within regions. Again, it is difficult to identify clear patterns, but provinces dominated by large cities seem to have somewhat higher unemployment rates than provinces with only small urban centers. Even though generalizations may not be easy, it is nevertheless clear that a geographic dimension of the unemployment problem exists. In fact, regional dummies explain individuals' employment status to a significant extent when controlling for personal characteristics such as age, gender, and education (Blanchard and others, 1995).

Whatever the determinants of the geographic distribution of unemployment rates, however, there is compelling evidence that the current pattern has persisted for many years. In fact, even the sharp increase in nationwide unemployment since the late 1970s has left the regions' or provinces' unemployment ranking almost unchanged, though absolute differences in unemployment rates have widened considerably. Scatter plots of the survey unemployment rates in 1977 and 1992 for the 50 Spanish provinces reveal a remarkable correlation between the provinces that have higher unemployment rates in the 1990s and those that had higher unemployment rates in the 1970s ([ILLUSTRATION FOR FIGURE 1 OMITTED], top left panel).(2)

The degree of persistence of geographical differences in unemployment varies considerably depending on the labor force participants' …