with high unemployment variation. A negative economic shock will increase unemployment in the lagging region without affecting wages, while the same shock in the leading region will reduce wages. As a result, the impact of a negative shock on employment will be smaller in the leading region and will not last as long as in the lagging region. If local wages were determined by local economic conditions, then temporary asymmetric economic shocks would not cause permanent regional unemployment disparities. 5 Some empirical evidence are in support of this argument
and delays in locating projects and high costs from uneconomic decisions about location. The evidence also reveals that attempts to induce growth in a lagging region by locating projects in areas which lack the minimal physical and human infrastructure required to support the projects, are likely to yield only modest benefits. There is also the problem of defining what a region is. What is called a region tends to vary from country to country and within a country. In general, the appropriate size of a region is one which is not so small as to lead to undue
many firms might be collectively profitable, but the market mechanism cannot achieve this. This is because, while each firm creates benefits for other firms, these do not enter its decision taking. It follows that even large wage differences between regions may be insufficient to induce firms to locate in a lagging region, rather than in an established center. A further implication is that there are threshold effects and ‘tipping points’. Policy changes below some threshold may be wholly ineffective, while a ‘big-push’ of policy across a range of actions may stand a
decision process they may be less powerful than the employers in the leading regions. 65. In a country with a centralized wage bargaining system and with wages determined by the leading region, low wage dispersion could coexist with high unemployment variation. A negative economic shock will increase unemployment in the lagging region without affecting wages, while the same shock in the leading region will reduce wages. As a result, the impact of a negative shock on employment will be smaller in the leading region and will not last as long as in the lagging region. If