Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain 1980-1995

This paper analyses the theoretical and empirical implications of the Chain Reaction Theory of unemployment movements on regional unemploment persistence and regional disparities. This is the first attempt to apply this theory to a regional context. The Chain Reaction Theory focuses on the interaction among labour market adjustment processes and the interplay of such processes and the dynamic structure of labour market shocks. Under this approach we may explain unemployment rate disparities between regions as the result of different responses to idyosincratic and aggregate shocks working their way through different labour market adjustment processes in each region. We test empirically this theory to the Spanish case with a regional dataset covering the 1980-2000 period. Our results show that the Chain Reaction Theory explains well the recent behaviour of Spanish regional disparities in unemployment.