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Mr. Philippe Egoume Bossogo, Mr. Jerald A Schiff, Ms. Miho Ihara, Mr. Tetsuya Konuki, and Ms. Kornelia Krajnyak

region out of high-unemployment equilibrium . Putting emphasis on developing transport infrastructure to link problem regions more tightly with foreign and domestic markets should be a priority. Properly designed job training could potentially make a high-unemployment region more attractive to investors, helping to pull the region out of its high-unemployment equilibrium . Most transition countries spend relatively little on training. Bringing the local skill mix closer to the one demanded by dynamic industries could be helped by an emphasis on updating skills

International Monetary Fund
This Selected Issues paper of the Republic of Estonia reviews the current account deficits, sustainability, and external solvency in the Baltic countries. The paper describes labor market trends in Estonia after the transition, institutional makeup of the market, and its effects on unemployment. The paper also discusses developments in regional unemployment, effects of regional disparities on average unemployment, and policy recommendations. Finally, the statistical appendix highlights the IMF's projections and estimates for the Republic of Estonia.
Mr. Antonio Spilimbergo and Mr. Paolo Mauro

This paper considers the adjustment of physical capital within a country in the long run and in the short run. It uses a unique data set on income, labor, human capital, and private and public physical capital in the Spanish regions over the past two decades. In the long run, the movement of physical capital is consistent with its estimated relative rates of return. In the short run, an adverse shock to a region results in a sharp drop in employment and a gradual decline of physical capital; the system returns to its initial capital/labor ratio after four years. The sharp drop in employment is consistent with the view that wages are rigid. The analysis of adjustment in the short run relies on a vector autoregression methodology in which shocks are identified as the interaction between oil prices and the share of manufacturing in a region’s employment.

Mr. Paolo Mauro, Mr. Eswar S Prasad, and Mr. Antonio Spilimbergo

Abstract

This section provides an empirical characterization of regional unemployment patterns in European countries. The magnitude of regional unemployment differences is compared across countries and over time. The persistence of these differences is also examined.

Mr. Philippe Egoume Bossogo, Mr. Jerald A Schiff, Ms. Miho Ihara, Mr. Tetsuya Konuki, and Ms. Kornelia Krajnyak

Abstract

More than a decade after the start of the transition process, unemployment rates remain in the double digits in a number of Central and Eastern European countries. That unemployment rates have failed to decline, even in countries experiencing good growth, is puzzling. In this paper the authors examine three interrelated questions: How has the transition from central planning to market economies affected labor market performance? How have labor market institutions and policies influenced developments? Why have regional differences in unemployment persisted? The authors take an eclectic methodological approach: construction of a new data set and a simple analytical model; econometric estimation; and case studies. They find that faster-performing countries have better unemployment records; that labor market policies have some, but not dominant, influence over labor market outcomes; that policies not typically viewed as labor market policies can nevertheless significantly affect labor markets; and that market processes cannot be relied on to eliminate regional differences in unemployment.

Mr. George S Tavlas

-of-trade shocks, negating the effectiveness of exchange rate adjustment between the countries as an instrument to deal with such shocks. Consequently, countries with similar production structures are deemed to be better candidates for currency unions than are countries whose production structures are markedly different. Fiscal integration . The higher the level of fiscal integration between two areas, the greater their ability to smooth out diverse shocks through fiscal transfers from a low-unemployment region to a high-unemployment region. In turn, fiscal harmonization

Mr. Athanasios Vamvakidis

developed regions to have wages above equilibrium in the less developed regions. Saint-Paul (1997) argued that wages in Italy and Germany are determined in the leading regions, North in Italy and West in Germany, and that the union members in the leading regions have an incentive to keep wage differentiation low to slow down migration flows. 4 Brunello, Lupi, and Ordine (2001) and Vamvakidis (2002) presented evidence for Italy suggesting that the wage in the South, the high unemployment region, is significantly affected by the unemployment rate in the North, the

Mr. Athanasios Vamvakidis
The theoretical literature has argued that a centralized wage bargaining system may result in low regional wage differentiation and high regional unemployment differentials. The empirical literature has found that centralized wage bargaining leads to lower wage inequality for different skills, industries and population groups, but has not investigated its impact on regional wage differentiation. Empirical evidence in this paper for EU regions for the period 1980-2000 suggests that countries with more coordinated wage bargaining systems have lower regional wage differentials, after controlling for regional productivity and unemployment differentials.
Christiane Krieger-Boden, Dirk Dohse, and Rüdiger Soltwedel

discrepancies over time. Within the four largest EU member states the ranking of regions by unemployment rates in any given year is highly correlated with the ranking in previous years ( Table 7 ). 19 In this respect, regional unemployment in most EU countries behaves quite differently from that in the U.S., where one period’s high unemployment region can become the next year’s low unemployment region ( Bertola and Ichino, 1996 ). The rank-order correlation coefficient for Europe as a whole reflects the decline of unemployment rates in the Netherlands, Denmark and the United

International Monetary Fund

with low unemployment, nor have they slowed sharply relative to such areas, except in eastern Germany. Despite progress, eastern Germany’s unit wage costs remain far above those prevailing in western Germany. Indeed, in Germany, relative wage costs of the high-unemployment region exceed those in Spain and Italy, where unit labor costs in the high unemployment regions are comparable to those in the low-unemployment regions (see tabulation below). France has no regional unemployment problems on the scale of those in the other countries. 121. Except in eastern