Abstract

One of the key issues in economics is the explanation of unemployment and its variation across different (regional) economies. Doing so modern mainstream macroeconomics frequently re-fers to institutional structures in the individual countries. Countries with more flexible labour markets have lower unemployment rates. This mainstream is based on the so-called European Labour Market Model of Layard, Nickell & Jackman (1991, 2005, cf. Carlin & Soskice 2006). There, unemployment results from the competing claims of groups of economic subjects (Franz 1992: 12). In order to increase employment, economic policy therefore has to create institutions which restrain these demands in particular those of the workers.

However, unemployment within a nation shows about the same level of variation as it does between countries (Südekum 2005) while there are generally only minor differences in the institu-tions. From this point of view, the large variation in regional unemployment in Germany is puzzling.

We suggest an explanation for the variation of unemployment, which is applicable both to the regional level and the national level. We refer to the dynamics of economies, which are driven by processes of structural change and technical progress. Depending on the life cycle phase of the respective industries technical progress has different effects on employment and thus on unem-ployment. In the early stages of the industry life cycle product demand is elastic and increases in productivity result in employment growth. Across subsequent life cycle stages demand becomes inelastic and productivity increases lead to a reduction in employment

Industries are usually regionally concentrated and regions are specialised on specific industries. For Krugman (1991: 5) the most striking characteristic of the geography of economic activity is its concentration. Although this concentration of individual industries in specific regions has de-clined somewhat in the last decades (USA: Krugman 1991: 75ff.; Möller, Tassinopoulos 2000), its extent remains astonishingly. If a region has specialised predominantly in a specific industry, its development depends strongly on the life cycle of this industry. The region falls into crisis when the main product of the respective industry reaches a phase of saturation in the later phase of its life cycle.

Thus the mechanism of product life cycle, price elasticity and technical progress leads through the specialisation of regional economies to differing spatial development path. We apply different empirical strategies to test our theoretical findings. We estimate Marshallian type demand functions using 2SLS to derive the price elasticities for different industries and link this informa-tion than to the labour market performance of the respective industries and regions using industry level time series data on output, prices, employment and national income for Germany provided by the Federal Statistical Office. Additionally we apply the job turnover approach using estab-lishment data. Regional developments of the job turnover and its component are identified and linked to the regional industry structure.

In a further step, a connection between regional structural change and the price-elasticity of demand for goods is made. This in turn affects the elasticity of regional labour demand. A model will be created that describes long term development of regions. This allows to categorize regions in winners and losers of of structural change as well as to forecast future developments which can be used to counsel actors of the regional economic policy.