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1 THE MYSTERY OF REGIONAL UNEMPLOYMENT DIFFERENTIALS A SURVEY OF THEORETICAL AND EMPIRICAL EXPLANATIONS J. Paul Elhorst Faculty of Economics University of Groningen P.O. Box 800 9700 AV Groningen The Netherlands tel. 31-50-3633893 fax. 31-50-3637337 e-mail: [email protected] ABSTRACT This paper attempts to provide an integrated overview of theoretical and empirical explanations used in the applied literature on regional unemployment differentials. On the basis of 41 empirical studies, four different model types covering nine theoretical constructs of regional unemployment determination and 13 sets of explanatory variables are identified. The overall conclusion is that theoretical and empirical explanations help to reduce the weaknesses in each other. While theory is found to predict that the regional unemployment rate depends on labour supply factors (a collection of factors which affect natural changes in the labour force, labour force participation, migration and commuting), labour demand factors and wage-setting factors, it is the empirical studies that gain a more profound understanding of the explanatory variables involved. Conversely, whereas most empirical studies provide clear-cut explanations for the signs of the explanatory variables, it is theory that shows that some of these explanations might be out of proportion. By grouping many studies together, this paper shows that there are indeed clear-cut trends. Paper to be presented at the 40th European Congress of the Regional Science Association Barcelona (Spain), 29th August - 1st September, 2000 Also appeared as Research Report (20)00C06 of the Research School "Systems, Organisation and Management", University of Groningen, 2 1. INTRODUCTION Unemployment varies with location but is often considered from only a national perspective. There are at least three reasons to consider unemployment from a regional perspective as well. First, the magnitude of unemployment disparities amo

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