The Natural Rate of Unemployment Hypothesis and the Evolution of Regional Disparities in Spanish Unemployment

Abstract

On both theoretical and empirical grounds, this paper demonstrates that the natural rate of unemployment (NRU) cannot explain the evolution of regional unemployment disparities in Spain. The analytical framework of the chain reaction theory (CRT) of unemployment argues that an interactive labour market system, rather than a single-equation model, is better equipped to accommodate unemployment dynamics and that unemployment does not gravitate towards its NRU due to the interplay of frictions and growth. Two groups of high and low unemployment regions are identified with substantial disparities that remain stable in their composition through time. Evaluating the natural rates for each group of regions, it is confirmed that regional unemployment disparities cannot be attributed to disparities in the NRUs. Thus, instead of focusing on the determinants of the NRU, an appraisal of the contributions of the exogenous variables to the unemployment trajectory should take hold in policy-making.